**Exhibit      13******

 

 

  

 

**2004      Annual Report to Shareholders**

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**GENERAL      OVERVIEW**

Hanover Foods      Corporation (as used herein the term “Corporation” or “Company”      refers to Hanover Foods Corporation and its consolidated subsidiaries) is a vertically integrated processor of food products which operates through seven (7) wholly-owned subsidiaries, Tri-Co. Foods Corp., Consumers      Packing Corporation, Spring Glen Fresh Foods, Inc., Hanover Insurance Corporation,      Ltd., Nittany Corporation, Bickel’s Snack Foods, Inc. and Aunt Kitty’s      Foods, Inc. Tri-Co. Foods Corp. has two (2) wholly-owned subsidiaries:      Sunwise Corporation and Mayapac, S.A. 

The Corporation      enjoys the strongest retail sales of its products in the mid-Atlantic states      and Florida. Introduction of frozen ethnic blends, specialty vegetables      and fruits, canned pasta, frozen soft pretzels, refrigerated food, canned      and frozen mushrooms and snack food products has enabled the Corporation      to increase and expand its distribution throughout the eastern seaboard.      Distribution in the remainder of the United States is limited to food service,      military and industrial customers. 

The Corporation’s operations are affected by the growing cycle of the vegetables it processes.  The Corporation’s business can be positively or negatively affected by weather conditions nationally and the resulting impact on crop yields.  Favorable weather conditions can produce high crop yields and an over-supply situation in a given year.  This over-supply typically will result in depressed selling prices and reduced profitability to the Corporation on the inventory produced from that year’s    crops. Excessive rain or drought conditions can produce low crop yields and    a shortage situation. This shortage typically will result in higher selling    prices and increased profitability to the Corporation. While the national    supply situation controls the pricing, the supply can differ regionally because    of variations in weather. Because many of the raw materials processed by    the Corporation are agricultural crops, production of products using these    crops is predominantly seasonal. As a result, the Corporation needs access    to working capital financing to meet its production requirements during theseperiods. 

The Corporation      markets its products under the brand names HANOVER, HANOVER FARMS, MYERS,      PHILLIPS, GIBBS, SUPERFINE, MARYLAND CHIEF, MITCHELL’S, DUTCH FARMS,      SUNWISE, O&C (jarred onions only), SPRING GLEN FRESH FOODS, SUNNYSIDE      FOODS, NOTTINGHAM, BICKEL’S, BON TON, YORK SNACKS, CABANA, DRAPER      KING COLE, VENICE MAID, AUNT KITTY’S and HARVEST CHOICE. The products      sold by the Corporation under these brand names include canned vegetables,      beans and pasta as well as frozen vegetables, frozen meat products, food      entrees, refrigerated and fresh foods, canned and frozen mushrooms and      potato chips.

**MANAGEMENT’S      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION****AND  RESULTS OF OPERATIONS**

**Forward      Looking Statements**

When used      in this Annual Report, the words or phrases “will likely result,” “are      expected to,” “will continue,” “is anticipated,” “estimate,” “projected,” or      similar expressions are intended to identify “forward looking statements” within      the meaning of the Private Securities Litigation Reform Act of 1995. Such      statements are subject to certain risks and uncertainties including but      not limited to quarterly fluctuations in operating results, competition,      state and federal regulation, environmental considerations, foreign operations,      and a change of control as a result of the pending Warehime family litigation.      Such factors, which are discussed in the Annual Report, could affect the      Corporation’s financial performance and could cause the Corporation’s      actual results for future periods to differ materially from any opinion      or statements expressed herein with respect to future periods. As a result,      the Corporation wishes to caution readers not to place undue reliance on      any such forward looking statements, which speak only as of the date made. 

**Description      of Business**

The Corporation      is a vertically integrated processor of food products in one industry segment.      The Corporation is involved in the growing, processing, canning, freezing,      freeze-drying, packaging, marketing and distribution of its products under      its own trademarks as well as other branded, customer and private labels.      The Corporation has operations in ten plants in Pennsylvania, one plant      in Maryland, one plant in Delaware, one plant in New Jersey and two plants      in Guatemala. The Corporation and its subsidiaries, in the normal course      of business, purchase and sell goods and services to related parties. See      Note 7 of the notes to the Consolidated Financial Statements. 

The Corporation’s      fiscal year ends at the close of operations on the Sunday nearest to May      31. Accordingly, the following discussion compares the results of operations      for the fiscal year ended May 30, 2004 compared to the year ended June      1, 2003, and the fiscal year ended June 1, 2003 compared to the year ended      June 2, 2002.

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**RESULTS      OF OPERATIONS**

**Year      Ended May 30, 2004 Compared to Year Ended June 1, 2003**

**Net      Sales**

 Consolidated      net sales were $318.0 million for fiscal 2004 compared to $290.3 million      for fiscal 2003. The increase in consolidated net sales comprised of the following      volume and sales price components: 

|                        | **Volume** |   | **Sales          Price** |   | **Combined** |   |
|-----------------------------|------------|--------|--------------------------|--------|--------------|--------|
|                        |            |   |                          |   |              |   |
| Frozen        Foods         | .3         | %      | (.5                      | )%     | (.2          | )%     |
| Canned        Foods         | 3.8        | %      | —                  |   | 3.8          | %      |
| Prepared/Snack        Foods | 4.3        | %      | 1.6                      | %      | 5.9          | %      |
|                        |            |   |                          |   |              |   |
|                        | 8.4        | %      | 1.1                      | %      | 9.5          | %      |
|                        |            |   |                          |   |              |   |

The increased      volume in frozen food sales was principally due to an increase in retail      brand sales and industrial sales. These increases were offset by decreases      in food service and private label sales. Frozen food prices have remained      relatively consistent with last fiscal year in all major sales areas.

 The increased      volume in canned food sales was principally due to increases in retail      brand sales, food service and private label sales as well as the canned      food plant acquisition of the assets of Venice Maid Foods, Vineland, NJ      made during the fourth quarter of fiscal 2004 which accounted for 35% of      the total volume increase. Canned food prices have remained relatively      consistent with last fiscal year in all major sales areas. 

 The increase      volume in prepared and snack foods was principally due to increases in      snack foods as well as the acquisition of snack food plant and business      of Wege Pretzel Co., Hanover, PA and the fresh prepared food plant acquisition      of Sunsprout of Lancaster County, Lancaster, PA made during the third and      fourth quarter of fiscal 2004 which accounted for 34% of the      total volume increase. The prices for snack foods remained consistent with      last fiscal year. The prices for prepared food increased due to larger      case sizes sold at higher unit prices at a major customer acquired in May      2003. 

**Cost      of Goods Sold**

 Consolidated      cost of goods sold represent 85.2% of consolidated net sales for fiscal      year 2004 compared to 84.2% for fiscal 2003. The consolidated cost of sales      increased $26.7 million to $271.0 million in fiscal 2004 compared to $244.3      million for fiscal 2003. The cost of sales increased $22.4 million due      to the volume increase of 8.4% for the current fiscal year. The remaining      increase was due to higher energy, health care and commodity costs during      the current fiscal year. 

**Selling      Expenses**

 Consolidated      selling expenses represented 3.8% of consolidated net sales for fiscal      2004 and 4.2% for fiscal 2003. Consolidated selling expenses decreased      from $12.2 million in fiscal 2003 to $12.1 million in fiscal 2004. The      decrease in the amount of selling expenses reflects lower customer advertising      and Company bonus provision for sales personnel. These decreases were partially      offset by increased package design and brokerage fees paid during the fiscal      year. 

**Administration      Expenses**

 Consolidated      administration expenses were $16.1 million for fiscal year 2004, or 5.1%      of consolidated net sales, as compared to $15.8 million, or 5.4% of consolidated      net sales in 2003. The increase in administration expenses reflects increases      in the provision for the supplemental pension benefits, provision for post-retirements      benefits as well as increases in the executive bonus provision for the      current fiscal year. These increases were partially offset by decreases      in the workman’s compensation insurance reserves at Hanover Insurance      Company, Limited, a wholly-owned subsidiary of Hanover Foods Corporation. 

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**Interest      Expense**

Consolidated      interest expense for fiscal 2004 decreased $0.5 million to $2.3 million      compared to $2.8 million in fiscal 2003. The decrease reflected lower average      borrowings as well as lower average borrowing rates for the fiscal year      2004 compared to fiscal year 2003. 

**Other      Income (Expense)**

Consolidated      other income increased $204,000 to $474,000 for fiscal 2004 as compared      to other income of $270,000 for fiscal 2003. The increase was due to income      generated from the sales of investments. This increase was partially offset      by an increase in the foreign exchange translation loss during fiscal year      2004. 

**Income      Taxes**

The provision      for corporate federal and state income taxes for the fiscal year 2004 was      $5.6 million or 32.9% of pretax earnings, as compared to $5.7 million or      36.4% of pretax earning for 2003. The decrease in the effective rate is      primarily due to increased earnings in jurisdictions with lower effective      tax rates for the current fiscal year as compared to the prior fiscal year.      Refer to Note 9 to the consolidated financial statements for a reconciliation      of the effective tax rate to the statutory rate. 

**Net      Earnings**

Consolidated      net earnings for fiscal year 2004 were $11.4 million, or 3.6% of consolidated      net sales, as compared to $9.9 million, or 3.4% of consolidated net sales      for fiscal 2003 as a result of the factors discussed above.

**RESULTS      OF OPERATIONS**

**Year      Ended June 1, 2003 Compared to Year Ended June 2, 2002**

**Net      Sales**

Consolidated      net sales were $290.3 million for fiscal 2003 compared to $290.2 million      for fiscal 2002. The increase in consolidated net sales comprised of the      following volume and sales price components: 

|                        | **Volume** |   | **Sales          Price** |   | **Combined** |   |
|-----------------------------|------------|--------|--------------------------|--------|--------------|--------|
|                        |            |   |                          |   |              |   |
| Frozen        Foods         | 1.0        | %      | (.7                      | )%     | .3           | %      |
| Canned        Foods         | (1.3       | )%     | .6                       | %      | (.7          | )%     |
| Prepared/Snack        Foods | .1         | %      | .3                       | %      | .4           | %      |
|                        |            |   |                          |   |              |   |
|                        | (.2        | )%     | .2                       | %      | 0            | %      |
|                        |            |   |                          |   |              |   |

****The      increased volume in frozen food sales was principally due to an increase      in retail brand sales and private label sales. These increases were partially      offset by decreases in food service and industrial sales. Frozen food prices      have remained relatively consistent with last fiscal year, however the      increase in price sensitive promotions did decrease price, and the increase      in private label sales was made at a lower price per unit that offset the      increased price in branded retail sales. 

The decreased      volume in canned food sales was principally due to a decrease in industrial      and private label sales. Canned food prices have remained relatively consistent      with last fiscal in all major sales areas. 

Prepared      and snack foods volume was consistent with last fiscal with increases in      prepared foods and offset by decreases in snack food sales. The prices      for both prepared and snack foods remained relatively consistent with last      fiscal year. 

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**Cost      of Goods Sold**

Consolidated      cost of goods sold represent 84.2% of consolidated net sales for fiscal      year 2003 compared to 84.6% for fiscal 2002. The consolidated cost of sales      decreased $1.4 million to $244.3 million in fiscal 2003 compared to $245.7      million for fiscal 2002. The cost of sales decreased $0.9 million primarily      due to a reduction in ingredient costs and to a lesser extent due to the      volume reduction which decreased cost of goods by $0.5 million for fiscal      2003. 

**Selling      Expenses**

Consolidated      selling expenses represented 4.2% of consolidated net sales for fiscal      2003 and 4.9% for fiscal 2002. The decrease in the amount of selling expenses      reflect lower media advertising, customer advertising, free goods marketing      program, accounts receivable write-off and the elimination of the amortization      of trademarks. 

**Administration      Expenses**

Consolidated      administration expenses were $15.8 million for fiscal year 2003, or 5.4%      of consolidated net sales, as compared to $14.6 million, or 5.0% of consolidated      net sales in 2002. The increase in administration expenses reflects increases      in outside professional fees and services, the provision for the supplemental      pension benefits, the provision for post-retirement benefits as well as      increase in the 401(k) contribution and the ESOP contribution. 

**Interest      Expense**

Consolidated      interest expense for fiscal 2003 decreased $0.8 million to $2.8 million      compared to $3.6 million in fiscal 2002. The decrease reflected lower average      borrowings as well as lower average borrowing rates for the fiscal year      compared to last fiscal year. 

**Other      Income (Expense)**

Consolidated      other income decreased $101,000 to $270,000 for fiscal 2003 as compared      to other income of $371,000 for fiscal 2002. The decrease was due to lower      gain on sale of investments and a lower gain on the sales of fixed assets. 

**Income      Taxes**

The provision      for corporate federal and state income tax for the fiscal year 2003 was      $5.7 million or 36.4% of pretax earnings, as compared to $5.1 million or      41.3% of pretax earning for 2002. The decrease in the effective rate was      primarily due to the elimination of the income taxes in our Guatemala subsidiary.      Alcosa lost its income tax exoneration on March 31, 2001, and the government      granted an income tax exoneration to Mayapac, S.A. beginning January 2002      and ending January 2012. 

**Net      Earnings**

Consolidated      net earnings for fiscal year 2003 were $9.9 million, or 3.4% of consolidated      net sales, as compared to $7.3 million, or 2.5% of consolidated net sales,      for fiscal 2002 as a result of the factors discussed above.

**RELATED      PARTY TRANSACTIONS**

During fiscal      2004, the Corporation and its subsidiaries, in the normal course of business,      purchase and sell goods and services to companies affiliated with the Corporation’s      directors and officers. These transactions are summarized below. 

During fiscal      2004, the Corporation rented equipment from Park 100 Foods, Inc. The rental      payments pursuant to such lease agreements totaled $19,000 during fiscal      2004. As of May 30, 2004, the Corporation had an accounts receivable of      $275,000 from Park 100 Foods, Inc. for food products sold and shipped to      Park 100 Foods, Inc. During fiscal 2004, the Corporation sold approximately      $1.3 million of frozen food products to Park 100 Foods, Inc., Tipton, Indiana.      James A. Washburn, a director of the Corporation, owns approximately 80%      of the outstanding stock of Park 100 Foods, Inc.

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During fiscal      2004, the Corporation leased a two story farm house, adjoining one story      guest house and adjoining ground located on Trolley Road, R.D. #3, Hanover,      Heidelberg Township, Pennsylvania, for customer housing and temporary new      employee housing from John A. and Patricia M. Warehime for a total of $45,000. 

During fiscal      2004, the Corporation leased a barn for seed storage, located in Heidelberg      Township, Pennsylvania for $4,000 from Warehime Enterprises, Inc. John      A. Warehime, Chairman of the Corporation, owns 15% of the outstanding stock      of Warehime Enterprises, Inc. 

During fiscal      2004, the Corporation purchased $1.1 million of contracted vegetables from      Lippy Brothers, Inc. As of May 30, 2004, the Corporation owed an amount      of $32,000 to Lippy Brothers, Inc. for vegetable crops purchased. T. Edward      Lippy, a director of the Corporation, owns approximately 37% of the outstanding      stock of Lippy Brothers, Inc. 

During fiscal      2003, the Corporation via its Guatemalan subsidiary, sold its condominium      real estate located in Naples, FL to John and Patricia M. Warehime for      $127,500, which approximates fair value. 

During fiscal      2004 the adult children of the Corporation’s Chairman, John Warehime,      were employed by the Corporation, including Jennifer Carter, a Director      of the Corporation, who was employed as Assistant to the Chairman, Jeffrey      Warehime, who is employed as Director – Fresh Produce, and Andrew      Warehime, who is employed as Special Sales Manager. Jennifer Carter’s      husband, Michael Carter, is employed as Director – Retail Branded      Sales. Jennifer Carter was and Jeffrey Warehime, Andrew Warehime and Michael      Carter are employed by the Corporation at annual salaries of $93,845, $100,857,      $63,993, $75,000 respectively. See “Part III — Item 11. Employment      Agreements and Change in Control Severance Agreements.” Ms. Carter      also receives director compensation customary for the Corporation’s      directors which totaled $18,000 during fiscal 2004. See “Part III — Item      10. Directors and Executive Officers of the Corporation — Director      Compensation.” On June 20, 2002, each of Jennifer Carter, Jeffrey      Warehime, and Andrew Warehime were granted an option to purchase 500 shares      of Class B common stock. On October 17, 2003, Jennifer Carter, Jeffrey      Warehime and Andrew Warehime were granted an option to purchase 1,500 shares      of Class B Common Stock at an exercise price of $118 per share. Michael      Carter was granted an option to purchase 750 shares of Class B Common Stock      at an exercise price of $118 per share. Andrea Kint, the daughter of      Pietro Giraffa, Vice President and Controller of the Corporation, is employed      as Assistant Production Manager — Hanover, PA Frozen Operations at      an annual salary of $50,923. On October 17, 2003, Andrea Kint was granted      an option to purchase 500 shares of Class B Common Stock at an exercise      price of $118 per share. 

**LIQUIDITY      AND CAPITAL RESOURCES**

The Corporation’s need for cash fluctuates based upon the seasonal nature of its business.  The Corporation’s cash flow requirements increase from June through November of each fiscal year as a result of the purchase of seasonal agricultural crops.  The Corporation’s    cash flow requirements decline from December through May of each year as    the seasonal inventory is sold. The Corporation utilizes lines of credit    to fund a portion of its cash requirements during periods of the year when    its requirements increase as a result of purchases of raw materials. The    Corporation generally repays these lines of credit when it receives fundsfrom the sale of its products. 

The discussion      and analysis of the Corporation’s liquidity and capital resources      should be read in conjunction with the Consolidated Statements of Cash      Flows, contained elsewhere herein. 

Net working      capital was $41.7 million at May 30, 2004 and $47.0 million at June 1,      2003. The current ratio was 1.66 on May 30, 2004 and 2.07 on June 1, 2003. 

Net cash provided      by operations for the fiscal year ended May 30, 2004 was $15.6 million,      compared to $23.1 million, for the fiscal year ended June 1, 2003. Sources      of net cash provided by operations consisted principally of net earnings      of $11.4 million adjusted for non-cash depreciation and amortization expense      of $9.9 million and increases in accounts payable and accrued expenses      of $4.3 million. The use of net cash for operations consisted primarily      of increases in inventory and accounts receivable of $8.6 million. 

Net cash provided      by operations for the fiscal year ended June 1, 2003 was $23.1 million,      compared to $19.0 million, for the fiscal year ended June 2, 2002. Sources      of net cash provided by operations consisted principally of net earnings      of $9.9 million and non-cash depreciation and amortization expense of $9.6      million and decreases in inventory and accounts receivable of $5.7 million.      The use of net cash for operations consisted primarily of decreased accounts      payable and accrued expenses of $2.4 million and deferred income taxes      of $1.3 million. 

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Net cash used by investing activities for the fiscal year ended May 30, 2004 was $26.4 million as compared to $5.5 million for fiscal year ended June 1, 2003. The principle use of funds was upgrade of property, plants and equipment as well as acquisitions of businesses. During the year ended May 30, 2004, $13.7 million was spent on development and modernization of equipment as compared to $5.6 million in fiscal year ended June 1,2003. During the fiscal year ended May 30, 2004 the corporation spent $12.2 million to acquire businesses. These projects were funded by internally generated funds and notes payable. 

Net cash used    by investing activities for the fiscal year ended June 1, 2003 was $5.5 million    as compared to $6.8 million for fiscal year ended June 2, 2002. The principal    use of funds was the upgrade of property, plants and equipment. During the    year ended June 1, 2003, $5.6 million was spent on development and modernization    of equipment as compared to $6.8 million in fiscal year ended June 2, 2002.    These projects were funded by internally generated funds. 

Net cash provided by financing activities was $8.7 million for the fiscal year ended May 30, 2004, compared to cash used by financing activities of $16.4 million for the fiscal year ended June 1, 2003. Seasonal borrowings amounting to $97.8 million were used throughout the fiscal year to fund operating needs and business acquisitions. Seasonal borrowings increased $14.0 million as of May 30, 2004 compared to June 1, 2004. Payments on long-term debt were $4.3 million. The weighted average cost of seasonal borrowing was 1.88% for the fiscal year ended May 30, 2004 compared to 2.28% for the fiscal year ended June 1, 2003. 

Net cash used by financing activities was $16.4 million for the fiscal year ended June 1, 2003, compared to cash used by financing activities of $11.1 million for the fiscal year ended June 2, 2002. Seasonal borrowings amounting to $145.3 million were used throughout the fiscal year to fund operating needs. Seasonal borrowing decreased $11.4 million as of June 1, 2003 compared to June 2, 2002. Payments on long-term debt were $4.3 million. The weighted average cost of seasonal borrowing was 2.28% for the fiscal year ended June 1, 2003 compared to 4.02% for the fiscal year ended June 2, 2002. 

At May 30, 2004, the Corporation hadcommitments from financial institutions to provide seasonal lines of credit in the amount of $50.0million. Borrowing is permitted within prescribed parameters in existing debt agreements, whichcontain certain performance covenants. The term loan agreements with the lenders and seasonalborrowing with financial institutions, contain various restrictive provisions including thoserelating to mergers and acquisitions, additional borrowing, guarantee of obligations, leasecommitments, limitations to declare or pay dividends, repurchase stock, and the maintenance ofworking capital and certain financial ratios and changes in control. Based on the requirements of theagreements at May 30, 2004, $38,576,000 of retained earnings were restricted from distribution. TheCorporation was in compliance with the restrictive provisions in the agreements as of May 30, 2004.See Notes 3 and 4 of the Notes to Consolidated Financial Statements in the Annual Report foradditional information regarding the Corporation’s seasonal borrowing with financialinstitutions and term loan agreements.

A change in control of theCorporation would trigger a repayment obligation with respect to $20.0 million in aggregate principalamount of 7.01% Senior Notes due September 15, 2011 of the Corporation (the “Notes”).  Inthe event of any change of control of the Corporation, the Corporation has an obligation to prepaythe Notes in the amount equal to 100% of the outstanding principal amount of the Notes and accruedinterest thereon, together with a premium equal to the applicable Make-Whole Amount, as defined inthe Note Purchase Agreement.  A “change in control” as defined in the Note PurchaseAgreement means the date on which (i) John Warehime ceases to hold the positions of Chairman,President and Chief Executive Officerof the Corporation or (ii) Gary T. Knisely ceases to hold the positions of Executive Vice Presidentand Secretary of the Corporation.  To the extent a change of control were to occur and the lendersdemand repayment of the Notes, the Corporation would be required to obtain an alternative fundingsource to repay this obligation.  While the Corporation currently believes it would be successfulin obtaining additional financing, no assurance can be given as to whether the Corporation will besuccessful in obtaining additional funding sources or if such financing will be on terms andconditions that are acceptable to the Corporation.  

The Corporation paid dividends onall classes of capital stock of $763,000 during fiscal 2004 compared to $688,000 in fiscal 2003.

The Corporation believes that ithas sufficient working capital and availability from seasonal lines of credit to meet its cash flowneeds.

The following table summarizes theCorporation’s contractual obligations and other commitments as of May 30, 2004 

|                          |   |       |   | **Payment Due by Period** |       |
|-------------------------------|--------|------------|--------|---------------------------|------------|
|                          |   |       |   |                           |       |
|                          |   |       |   | **Less Than**             |       |   |   |   |   |   |   | **More Than** |   |
| **Contractual Obligation**    |   | **Total**  |   | **1 Year**                |       | **1-3 Years** |   | **3-5 Years** |   | **5 Years** |   |
|                               |   |            |   |                           |       |   |  |   |  |   |  |   |
| Short-Term Debt Obligations   | $      | 21,609,000 |   | $                         | 21,609,000 |   | $ | -0 | - | $ | -0 | - | $ | -0 | - |
| Long-Term Debt Obligations    |   | 25,357,000 |   |                      | 4,286,000  |   |   | 8,571,000 |   |   | 5,000,000 |   |   | 7,500,000 |   |
| Operating Lease Obligations   |   | 1,717,000  |   |                      | 808,000    |   |   | 825,000 |   |   | 84,000 |   |   | -0 | - |
| Other Obligations             |   | 5,010,000  |   |                      | 1,670,000  |   |   | 3,340,000 |   |   | -0 | - |   | -0 | - |
|                          |   |            |   |                      |            |   |   |  |   |   |  |   |   |  |   |
| Total Contractual Obligations | $      | 53,693,000 |   | $                         | 28,373,000 |   | $ | 12,736,000 |   | $ | 5,084,000 |   | $ | 7,500,000 |   |
|                          |   |            |   |                           |            |   |  |  |   |  |  |   |  |  |   |

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Currently, the Corporation is obligated to purchase 5,000,000 pounds of tomato paste from The Morning Star Packing Company, L.P., Los Banos, California in each of the fiscal years from 2005 through 2007.

The Corporation’s sources of liquidity are primarily funds from operation and available amounts under seasonal lines of credit expiring (two of which expire on October 31, 2004 and one will expire January 28, 2005), which are expected to be renewed in the ordinary course of business.

**APPLICATION OF CRITICAL ACCOUNTING POLICIES**

Preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires the Corporation to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Many of the estimates and assumptions require significant judgment. Future actual results could differ from those estimates and assumptions and could have a significant impact on our consolidated results of operations, financial position and cash flows.

The following accounting policies, estimates and assumptions which have been discussed with the Audit Committee are particularly sensitive because of their significance on the preparation of the Corporation’s consolidated financial statements:

|   | • | The allowance        for potentially uncollectible receivables and pending deductions requires        management to make significant judgments in estimating future amounts        to be received. Our judgments are based upon historical experience and        current market conditions. Changes in estimates could be impacted as        a result of events, such as a deterioration of the credit status of customers    or material reductions in product and sales volumes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | • | Determination        of liabilities for pension and post-retirement benefits includes significant        assumptions and estimates relating to compensation and health care cost        trends, discount rates and rate of return on plan assets. The assumptions    are based upon current market and health care trends.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | • | Long-lived        assets are reviewed for impairment whenever events or changes in circumstances        indicate that the carrying amount of the asset may not be recoverable.        Recoverability of assets to be held and used is measured by a comparison        of the carrying amount of the assets to future net cash flows estimated        to be generated by such assets. If such assets are considered to be impaired,        the impairment to be recognized is the amount by which the carrying amount        of the assets exceeds the fair value of the assets. However, determining        fair value is subject to estimates of both cash flows and interest rates        and different estimates could yield different results. There are no events        or changes in circumstances of which management is aware indicating that        the carrying value of the Corporation’s long-lived assets may not    be recoverable. |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | • | Effective        June 1, 2002, the Corporation adopted Statement of Financial Accounting        Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS        142). In accordance with SFAS 142, goodwill and indefinite-lived intangible        assets are no longer amortized but are reviewed at least annually for        impairment. As required by SFAS 142, management performed transitional        impairment testing during the third quarter and annual impairment testing        of goodwill and indefinite-lived intangible assets during the fourth        quarter of fiscal year 2003. These tests confirmed that the fair value        of the Corporation’s reporting units exceeds their carrying values,        and that no impairment loss needed to be recognized for goodwill upon    the adoption of SFAS 142.                                                                                            |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |    | The annual        evaluation of goodwill and other indefinite-lived intangible assets requires        the use of estimates about future operating results for each reporting        unit to determine their estimated fair value. Changes in forecasted operations        can materially affect these estimates. Additionally, other changes in        the estimates and assumptions, including the discount rate and expected        long-term growth rate, which drive the valuation techniques employed        to estimate the fair value of goodwill and other indefinite-lived intangible        assets could change and, therefore, impact the assessments of impairment    in the future.****                                                                                                                                                                                                                                                    |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

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The footnotes to the consolidated financial statements provide additional information on accounting policies and assumptions used by the Corporation. 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

The Corporation is subject to market risk associated with changes in interest rates. To manage the risk of fluctuations in interest rates, the Corporation’s borrowings are a mix of fixed and floating rate obligations. This includes the $25.3 million of unsecured senior notes payable, $5.3 million bears interest at an 8.74% fixed rate and is due in 2007, $20.0 million bears interest at a 7.01% fixed rate and is due in 2013. The Corporation also maintains short-term unsecured lines of credit that bear interest at floating rates. 

The following table presents the expected maturity and effective interest rates of the Corporation’s debt obligations (dollars in thousands): 

|                                      |     |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |      |   |   |   |   |   |   |   | **Fair** |   |
|-------------------------------------------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|-----------|--------|-----------|--------|--------|--------|--------|--------|--------|--------|----------|--------|
|                                      | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **2008** |   | **2009** |   | **Thereafter** |   | **Total** |   | **Value** |   |
|                                      |          |   |          |   |          |   |          |   |          |   |          |   |                |   |      |        |      |   |        |   |
| **Fixed Rate**                            |     |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |      |   |   |   |   |   |   |   |     |   |   |
|    Unsecured senior notes  | $        | 4,286  |     | $      | 4,286    |   | $        | 4,286  |     | $      | 4,285    |   | $              | 2,500  |      | $      | 2,500     |   | $      | 7,500  |   | $      | 25,357 |   |     | — |   |
|    Effective interest rate | 7.42     | %      | 7.37     | %      | 7.30     | %      | 7.20     | %      | 7.01     | %      | 7.01     | %      | 7.01           | %      |      | 7.22   | %         |   | — |   |
| **Variable Rate**                         |     |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |      |   |   |   |   |   |   |   |     |   |   |
|    Lines of credit         | $        | 21,609 |     |   | —   |   |     | — |     |   | —   |   |           | — |      |   | —    |   |   | — |   | $      | 21,609 |   | $        | 21,609 |   |
|    Effective interest rate | 1.81     | %      |     | — |     |   | —   |   |     | — |     |   | —         |   |      | — |      |   | — |   |   | 1.81   | %      |   | —   |   |

**IMPACT OF EVENTS AND COMMITMENTS OF FUTURE OPERATIONS**

**Competition in the Marketplace**

The Corporation faced stiff competition from national and regional branded companies during the entire fiscal year 2004 in all of its market areas and management anticipates this competitive environment to continue throughout fiscal year 2005. 

**Impact of Inflation and Changing Prices**

The changes in cost and prices within the Corporation’s business due to inflation were not significantly different from inflation in the United States economy as a whole. Levels of capital investment, pricing and inventory investment were not materially affected by the moderate inflation.

**New Accounting Standards**

In May 2003, the FASB issued SFAS No. 150 *Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.*This statement establishes standards for how an issuer classifies and measure certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument within its scope as a liability (or an asset in some circumstances). The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The statement is not expected to have a material impact on our consolidated financial statements. 

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**FINANCIALHIGHLIGHTS FIVE YEARS(in thousands except share and per-share data)**

The consolidated financial information set forth below should be read in conjunction with the more detailed consolidated financial statements, including related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” including elsewhere in this Annual Report. 

|                                  | **May 30,** |    | **June 1,** |    | **June 2,** |   | **June 3,** |    | **May 28,** |    |
|---------------------------------------|-------------|---------|-------------|---------|-------------|--------|-------------|---------|-------------|---------|
|                                  | **2004**    |    | **2003**    |    | **2002**    |   | **2001**    |    | **2000**    |    |
|                                  |             |    |             |    |             |   |             |         |        |         |   |
| Net Sales                             | $           | 318,028 |        | $       | 290,311     |   | $           | 290,227 |        | $       | 293,049 |   | $ | 277,334 |   |
| Earnings before income taxes          | $           | 17,027  |        | $       | 15,528      |   | $           | 12,392  |        | $       | 9,158 |   | $ | 13,648 |   |
| Net Earnings                          | $           | 11,441  |        | $       | 9,874       |   | $           | 7,271   |        | $       | 6,661 |   | $ | 8,619 |   |
| Net Earnings per common share-basic   | $           | 15.74   |        | $       | 13.64       |   | $           | 10.10   |        | $       | 9.26 |   | $ | 11.99 |   |
| Net Earnings per common share-diluted | $           | 15.51   |        | $       | 13.40       |   | $           | 9.97    |        | $       | 9.15 |   | $ | 11.82 |   |
| Basic weighted-average shares         |             | 724,186 |        |         | 720,684     |   |             | 716,191 |        |         | 714,565 |   |  | 715,249 |   |
| Diluted weighted-average shares       | 737,608     |    |             | 733,750 |        |        | 729,577     |    |             | 728,235 |   |  | 729,389 |   |
| Common shares outstanding-year end    | 724,972     |    |             | 723,330 |        |        | 718,791     |    |             | 714,496 |   |  | 714,670 |   |
| Preferred shares outstanding-year end |        | 24,564  |        |         | 24,564      |   |             | 24,564  |        |         | 24,724 |   |  | 24,764 |   |
| Working Capital                       | $           | 41,661  |        | $       | 47,027      |   | $           | 36,547  |        | $       | 6,826 |   | $ | 7,566 |   |
| Property, plant and equipment-net     | $           | 84,105  |        | $       | 72,634      |   | $           | 76,639  |        | $       | 78,837 |   | $ | 73,484 |   |
| Long-term debt                        | $           | 21,071  |        | $       | 25,357      |   | $           | 29,643  |        | $       | 8,940 |   | $ | 10,741 |   |
| Stockholders’ equity             | $           | 104,100 |        | $       | 93,217      |   | $           | 83,991  |        | $       | 77,465 |   | $ | 72,312 |   |
| Total assets                          | $           | 199,388 |        | $       | 171,433     |   | $           | 179,016 |        | $       | 180,728 |   | $ | 179,512 |   |
| Dividend per common share             | $           | 1.10    |        | $       | 1.10        |   | $           | 1.10    |        | $       | 1.10 |   | $ | 1.21 |   |

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**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

| Reports of Independent Registered Public Accounting Firms                                                                          | F-2    |        |
|------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                               |   |   |
| Consolidated    Balance Sheets as of May 30, 2004 and June 1, 2003                                                                 | F-4    |        |
|                                                                                                                               |   |   |
| Consolidated           Statements of Earnings for the Years Ended May 30, 2004, June 1, 2003, and    June 2, 2002                  | F-6    |        |
|                                                                                                                               |   |   |
| Consolidated           Statements of Comprehensive Income for the Years Ended May 30, 2004,    June 1, 2003 and June 2, 2002       | F-7    |        |
|                                                                                                                               |   |   |
| Consolidated           Statements of Cash Flows for the Years Ended May 30, 2004, June 1,    2003, and June 2, 2002                | F-8    |        |
|                                                                                                                               |   |   |
| Consolidated           Statements of Stockholders’ Equity for the Years Ended May 30,    2004, June 1, 2003, and June 2, 2002 | F-9    |        |
|                                                                                                                               |   |   |
| Notes           to Consolidated Financial Statements for the Years Ended May 30, 2004,    June 1, 2003, and June 2, 2002           | F-10   |        |

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**Report of Independent Registered Public Accounting Firm**

Board of Directorsand StockholdersHanover Foods Corporation: 

We have audited the accompanying consolidated balance sheet of Hanover Foods Corporation and subsidiaries as of May 30, 2004, and the related consolidated statements of earnings, comprehensive income, cash flows, and stockholders’ equity for the year then ended. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe our audit provides a reasonable basis for our opinion. 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hanover Foods Corporation and subsidiaries at May 30, 2004, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. 

/s/BDO Seidman,LLPBethesda, MDJuly 23, 2004 

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**Report of Independent Registered Public Accounting Firm**

Board of Directors and Stockholders Hanover Foods Corporation: 

We have audited the accompanying consolidated balance sheet of Hanover Foods Corporation and subsidiaries as of June 1, 2003 and the related consolidated statements of earnings, comprehensive income, cash flows, and stockholders’ equity for each of the years in the two-year period ended June 1, 2003. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hanover Foods Corporation and subsidiaries as of June 1, 2003 and the results of their operations and their cash flows for each of the years in the two-year period ended June 1, 2003, in conformity with U.S. generally accepted accounting principles. 

/s/KPMG LLP Harrisburg, Pennsylvania July 23, 2003 

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**HANOVER FOODS CORPORATION AND SUBSIDIARIES****CONSOLIDATED BALANCE SHEETS****May 30, 2004 AND JUNE 1, 2003**

|                                                                                                      |   | **May          30,** |   |   | **June          1,** |   |
|---------------------------------------------------------------------------------------------------------------------|--------|----------------------|--------|--------|----------------------|--------|
| **Assets**                                                                                                          |   | **2004**             |   |   | **2003**             |   |
|                                                                                                                |   |                      |   |   |                      |   |
|                                                                                                                |   |                 |   |   |                 |   |
| Current assets:                                                                                                     |   |                 |   |   |                 |   |
| Cash    and cash equivalents                                                                                        | $      | 3,015,000            |   | $      | 4,128,000            |   |
| Accounts         and notes receivable – net of allowance for doubtful accounts of    $1,547,000 and $1,393,000 |   | 30,323,000           |   |   | 25,099,000           |   |
| Accounts    receivable from related parties                                                                         |   | 275,000              |   |   | 163,000              |   |
| Inventories:                                                                                                        |   |                 |   |   |                 |   |
| Finished    goods                                                                                                   |   | 46,779,000           |   |   | 40,746,000           |   |
| Raw    materials and supplies                                                                                       |   | 17,027,000           |   |   | 12,472,000           |   |
| Prepaid    expenses                                                                                                 |   | 6,958,000            |   |   | 7,306,000            |   |
| Deferred    income taxes                                                                                            |   | 917,000              |   |   | 917,000              |   |
|                                                                                                                |   |                      |   |   |                      |   |
|                                                                                                                |   |                 |   |   |                 |   |
| Total current assets                                                                                                |   | 105,294,000          |   |   | 90,831,000           |   |
|                                                                                                                |   |                      |   |   |                      |   |
|                                                                                                                |   |                 |   |   |                 |   |
| Property, plant, and equipment – at cost:                                                                      |   |                 |   |   |                 |   |
| Land    and buildings                                                                                               |   | 63,585,000           |   |   | 53,972,000           |   |
| Machinery    and equipment                                                                                          |   | 135,029,000          |   |   | 128,422,000          |   |
| Leasehold    improvements                                                                                           |   | 544,000              |   |   | 544,000              |   |
|                                                                                                                |   |                      |   |   |                      |   |
|                                                                                                                |   |                 |   |   |                 |   |
|                                                                                                                |   | 199,158,000          |   |   | 182,938,000          |   |
|                                                                                                                |   |                 |   |   |                 |   |
| Less accumulated depreciation and amortization                                                                      |   | 121,028,000          |   |   | 111,255,000          |   |
|                                                                                                                |   |                      |   |   |                      |   |
|                                                                                                                |   |                 |   |   |                 |   |
|                                                                                                                |   | 78,130,000           |   |   | 71,683,000           |   |
|                                                                                                                |   |                 |   |   |                 |   |
| Construction in progress                                                                                            |   | 5,975,000            |   |   | 951,000              |   |
|                                                                                                                |   |                      |   |   |                      |   |
|                                                                                                                |   |                 |   |   |                 |   |
|                                                                                                                |   | 84,105,000           |   |   | 72,634,000           |   |
|                                                                                                                |   |                      |   |   |                      |   |
|                                                                                                                |   |                 |   |   |                 |   |
| Other assets:                                                                                                       |   |                 |   |   |                 |   |
| Goodwill                                                                                                            |   | 2,070,000            |   |   | 1,300,000            |   |
| Intangible    assets                                                                                                |   | 2,274,000            |   |   | 2,239,000            |   |
| Other    assets                                                                                                     |   | 5,645,000            |   |   | 4,429,000            |   |
|                                                                                                                |   |                      |   |   |                      |   |
|                                                                                                                |   |                 |   |   |                 |   |
| Total assets                                                                                                        | $      | 199,388,000          |   | $      | 171,433,000          |   |
|                                                                                                                |   |                      |   |   |                      |   |

See accompanying notes to consolidated financial statements.

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**HANOVER FOODS CORPORATION AND SUBSIDIARIES****CONSOLIDATED BALANCE SHEETS****MAY 30, 2004 AND JUNE 1, 2003**

|                                                                                           |   | **May          30,** |   |   | **June          1,** |   |
|------------------------------------------------------------------------------------------------|--------|----------------------|--------|--------|----------------------|--------|
|       **Liabilities              and Stockholders’ Equity** |   | **2004**             |   |   | **2003**             |   |
|                                                                                           |   |                      |   |   |                      |   |
|                                                                                           |   |                 |   |   |                 |   |
| Current liabilities:                                                                           |   |                 |   |   |                 |   |
|    Accounts payable                                                             | $      | 23,393,000           |   | $      | 19,745,000           |   |
|    Accounts payable to related parties                                          |   | 32,000               |   |   | 7,000                |   |
|    Notes payable – banks                                                   |   | 21,609,000           |   |   | 7,634,000            |   |
|    Accrued expenses                                                             |   | 14,011,000           |   |   | 10,921,000           |   |
|    Current maturities of long-term debt                                         |   | 4,286,000            |   |   | 4,286,000            |   |
|    Income taxes payable                                                         |   | 302,000              |   |   | 1,211,000            |   |
|                                                                                           |   |                      |   |   |                      |   |
|                                                                                           |   |                 |   |   |                 |   |
| Total current liabilities                                                                      |   | 63,633,000           |   |   | 43,804,000           |   |
|                                                                                           |   |                 |   |   |                 |   |
| Long-term debt, less current maturities                                                        |   | 21,071,000           |   |   | 25,357,000           |   |
| Deferred income taxes                                                                          |   | 2,948,000            |   |   | 3,139,000            |   |
| Other liabilities                                                                              |   | 7,636,000            |   |   | 5,916,000            |   |
|                                                                                           |   |                      |   |   |                      |   |
|                                                                                           |   |                 |   |   |                 |   |
| Total liabilities                                                                              |   | 95,288,000           |   |   | 78,216,000           |   |
|                                                                                           |   |                      |   |   |                      |   |
|                                                                                           |   |                 |   |   |                 |   |
| Commitments and contingencies (note 9)                                                         |   |                 |   |   |                 |   |
|                                                                                           |   |                 |   |   |                 |   |
| Stockholders’ equity:                                                                     |   |                 |   |   |                 |   |
|    Series A and B 8-1/4% cumulative convertible preferred stock                 |   | 776,000              |   |   | 776,000              |   |
|    Series C cumulative convertible preferred stock                              |   | 250,000              |   |   | 250,000              |   |
|    Common stock, Class A – non-voting                                      |   | 8,733,000            |   |   | 8,733,000            |   |
|    Common stock, Class B – voting                                          |   | 21,213,250           |   |   | 16,227,000           |   |
|    Capital paid in excess of par value                                          |   | 34,913,850           |   |   | 16,372,000           |   |
|    Retained earnings                                                            |   | 87,424,000           |   |   | 76,746,000           |   |
|    Treasury stock, at cost                                                      |   | (8,379,000           | )      |   | (8,172,000           | )      |
|    Employee Stock Trust                                                         |   | (40,419,100          | )      |   | (17,096,000          | )      |
|    Accumulated other comprehensive loss                                         |   | (412,000             | )      |   | (619,000             | )      |
|                                                                                           |   |                      |   |   |                      |   |
|                                                                                           |   |                 |   |   |                 |   |
|    Total stockholders’ equity                                              |   | 104,100,000          |   |   | 93,217,000           |   |
|                                                                                           |   |                      |   |   |                      |   |
|                                                                                           |   |                 |   |   |                 |   |
| Total liabilities and stockholders’ equity                                                | $      | 199,388,000          |   | $      | 171,433,000          |   |
|                                                                                           |   |                      |   |   |                      |   |

See accompanying notes to consolidated financial statements.

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**HANOVER  FOODS CORPORATION AND SUBSIDIARIES****CONSOLIDATED  STATEMENTS OF EARNINGS  YEARS ENDED MAY 30, 2004, JUNE 1, 2003 AND JUNE 2, 2002**

|                                 |      | **Year      Ended** |      |      | **Year      Ended** |      |      | **Year      ended** |      |
|-----------------------------------------------------|--------------------------|---------------------|--------------------------|--------------------------|---------------------|--------------------------|--------------------------|---------------------|--------------------------|
| **May      30,**                                    | **June      1,**         | **June      2,**    |
| **2004**                                            | **2003**                 | **2002**            |
|                                                |                          |                     |                     |                          |                     |                     |                          |                     |                     |
| Net sales                                           | $                        | 318,028,000         |                     | $                        | 290,311,000         |                     | $                        | 290,227,000         |                     |
| Cost of      goods sold                             |                     | 270,979,000         |                     |                     | 244,302,000         |                     |                     | 245,673,000         |                     |
|                                                |                          |                     |                     |                          |                     |                     |                          |                     |                     |
|    Gross      profit                 |                     | 47,049,000          |                     |                     | 46,009,000          |                     |                     | 44,554,000          |                     |
| Selling      expenses                               |                     | 12,053,000          |                     |                     | 12,192,000          |                     |                     | 14,306,000          |                     |
| Administrative      expenses                        |                     | 16,121,000          |                     |                     | 15,767,000          |                     |                     | 14,624,000          |                     |
|                                                |                          |                     |                     |                          |                     |                     |                          |                     |                     |
|    Operating      profit             |                     | 18,875,000          |                     |                     | 18,050,000          |                     |                     | 15,624,000          |                     |
| Interest      expense                               |                     | 2,322,000           |                     |                     | 2,792,000           |                     |                     | 3,603,000           |                     |
| Other income      – net                        |                     | (474,000            | )                        |                     | (270,000            | )                        |                     | (371,000            | )                        |
|                                                |                          |                     |                     |                          |                     |                     |                          |                     |                     |
|    Earnings      before income taxes |                     | 17,027,000          |                     |                     | 15,528,000          |                     |                     | 12,392,000          |                     |
| Income taxes                                        |                     | 5,586,000           |                     |                     | 5,654,000           |                     |                     | 5,121,000           |                     |
|                                                |                          |                     |                     |                          |                     |                     |                          |                     |                     |
|    Net      earnings                 |                     | 11,441,000          |                     |                     | 9,874,000           |                     |                     | 7,271,000           |                     |
| Dividends      on preferred stock                   |                     | 41,000              |                     |                     | 41,000              |                     |                     | 41,000              |                     |
|                                                |                          |                     |                     |                          |                     |                     |                          |                     |                     |
|    Net      earnings applicable to   |                     |                |                     |                     |                |                     |                     |                |                     |
|    Common      stock                 | $                        | 11,400,000          |                     | $                        | 9,833,000           |                     | $                        | 7,230,000           |                     |
|                                                |                          |                     |                     |                          |                     |                     |                          |                     |                     |
| Basic earnings      per common share                | $                        | 15.74               |                     | $                        | 13.64               |                     | $                        | 10.10               |                     |
|                                                |                          |                     |                     |                          |                     |                     |                          |                     |                     |
| Diluted      earnings per common share              | $                        | 15.51               |                     | $                        | 13.46               |                     | $                        | 9.97                |                     |
|                                                |                          |                     |                     |                          |                     |                     |                          |                     |                     |

See accompanying notes to consolidated financial statements.

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**HANOVER  FOODS CORPORATION****AND  SUBSIDIARIES****CONSOLIDATED  STATEMENTS OF COMPREHENSIVE INCOME****YEARS  ENDED MAY 30, 2004, JUNE 1, 2003 AND JUNE 2, 2002**

|                    |                                                                                                                                                           | **Year      Ended** |    |   | **Year      Ended** |     |   | **Year      Ended** |     |
|----------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------|---------|--------|---------------------|----------|--------|---------------------|----------|
| **May      30,**                       | **June      1,**                                                                                                                                               | **June      2,**    |
| **2004**                               | **2003**                                                                                                                                                       | **2002**            |
|                                   |                                                                                                                                                                |                     |    |        |                     |     |        |                     |     |
| Net      earnings                      | $                                                                                                                                                              | 11,441,000          |    | $      | 9,874,000           |     | $      | 7,271,000           |     |
|                                   |                                                                                                                                                                |                     |    |        |                     |     |        |                     |     |
| Other      comprehensive income        |                                                                                                                                                           |                |    |   |                |     |   |                |     |
|                                   | Unrealized          gain (loss) on securities, net of reclassification adjustments (net    of taxes of $110,000 in 2004, $29,000 in 2003, and $44,000 in 2002) |                | 207,000 |   |                | (22,000  | )      |                | (238,000 | ) |
|                                   |                                                                                                                                                           |                |    |   |                |     |   |                |     |
|                                   | Minimum          pension liability adjustment (net of taxes of $0 in 2004, $328,000    in 2003, and $1,000 in 2002)                                            |                | 0       |   |                | (458,000 | )      |                | (3,000   | ) |
|                                   |                                                                                                                                                                |                     |    |        |                     |     |        |                     |     |
| Other      comprehensive income (loss) |                                                                                                                                                           | 207,000             |    |   | (480,000            | )        |   | (241,000            | )        |
|                                   |                                                                                                                                                                |                     |    |        |                     |     |        |                     |     |
| Comprehensive      income              | $                                                                                                                                                              | 11,648,000          |    | $      | 9,394,000           |     | $      | 7,030,000           |     |
|                                   |                                                                                                                                                                |                     |    |        |                     |     |        |                     |     |

See accompanying notes to consolidated financial statements.

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**HANOVER  FOODS CORPORATION AND SUBSIDIARIES****CONSOLIDATED  STATEMENTS OF CASH FLOWS  YEARS ENDED MAY 30, 2004, JUNE 1, 2003 AND JUNE 2, 2002**

|                                                                                                                                    |      | **Year      Ended** |      |      | **Year      Ended** |      |      | **Year      Ended** |      |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------|---------------------|--------------------------|--------------------------|---------------------|--------------------------|--------------------------|---------------------|--------------------------|
| **Ended**                                                                                                                                              | **ended**                | **Ended**           |
| **May      30,**                                                                                                                                       | **June      1,**         | **June      2,**    |
| **2004**                                                                                                                                               | **2003**                 | **2002**            |
|                                                                                                                                                   |                          |                     |                     |                          |                     |                     |                          |                     |                     |
| Cash flows      from operating activities:                                                                                                             |                     |                |                     |                     |                |                     |                     |                |                     |
|    Net      earnings                                                                                                                    | $                        | 11,441,000          |                     | $                        | 9,874,000           |                     | $                        | 7,271,000           |                     |
|    Adjustments      to reconcile net earnings to net cash                                                                               |                     |                |                     |                     |                |                     |                     |                |                     |
|          provided      by operating activities:                                                           |                     |                |                     |                     |                |                     |                     |                |                     |
|                Depreciation      and amortization                           |                     | 9,919,000           |                     |                     | 9,604,000           |                     |                     | 9,375,000           |                     |
|                Gain      on sale of property, plant, and equipment          |                     | (73,000             | )                        |                     | (126,000            | )                        |                     | (120,000            | )                        |
|                Loss      (gain) on sale of investments                      |                     | 19,000              |                     |                     | (18,000             | )                        |                     | (105,000            | )                        |
|                Deferred      income taxes                                   |                     | (191,000            | )                        |                     | (1,279,000          | )                        |                     | 396,000             |                     |
|                Non      cash charge for ESOP contribution                   |                     | 204,000             |                     |                     | 544,000             |                     |                     | 480,000             |                     |
|                Change      in assets and liabilities:                       |                     |                |                     |                     |                |                     |                     |                |                     |
|                   Accounts      and notes receivable         |                     | (2,982,000          | )                        |                     | 1,822,000           |                     |                     | 442,000             |                     |
|                   Inventories                                |                     | (5,617,000          | )                        |                     | 3,919,000           |                     |                     | 2,615,000           |                     |
|                   Prepaid      expenses and other assets     |                     | (1,558,000          | )                        |                     | (243,000            | )                        |                     | (3,606,000          | )                        |
|                   Accounts      payable and accrued expenses |                     | 4,348,000           |                     |                     | (2,406,000          | )                        |                     | 1,182,000           |                     |
|                   Income      taxes payable                  |                     | (1,141,000          | )                        |                     | 29,000              |                     |                     | 543,000             |                     |
|                   Other      liabilities                     |                     | 1,270,000           |                     |                     | 1,417,000           |                     |                     | 424,000             |                     |
|                                                                                                                                                   |                          |                     |                     |                          |                     |                     |                          |                     |                     |
| Net cash      provided by operating activities                                                                                                         |                     | 15,639,000          |                     |                     | 23,137,000          |                     |                     | 18,897,000          |                     |
|                                                                                                                                                   |                          |                     |                     |                          |                     |                     |                          |                     |                     |
| Cash flows      from investing activities:                                                                                                             |                     |                |                     |                     |                |                     |                     |                |                     |
|       Acquisition      of businesses                                                                                     |                     | (12,173,000         | )                        |                     | 0                   |                     |                     | 0                   |                     |
|       Acquisitions      of property, plant, and equipment                                                                |                     | (13,733,000         | )                        |                     | (5,614,000          | )                        |                     | (6,779,000          | )                        |
|       Proceeds      from dispositions of property, plant,                                                                |                     |                |                     |                     |                |                     |                     |                |                     |
|             and      equipment                                                             |                     | 436,000             |                     |                     | 151,000             |                     |                     | 0                   |                     |
|                                                                                                                                                   |                          |                     |                     |                          |                     |                     |                          |                     |                     |
| Net cash      used in investing activities                                                                                                             |                     | (25,470,000         | )                        |                     | (5,463,000          | )                        |                     | (6,779,000          | )                        |
|                                                                                                                                                   |                          |                     |                     |                          |                     |                     |                          |                     |                     |
| Cash flows      from financing activities:                                                                                                             |                     |                |                     |                     |                |                     |                     |                |                     |
|          Proceeds      from notes payable                                                                 |                     | 97,752,000          |                     |                     | 145,250,000         |                     |                     | 212,419,000         |                     |
|          Payment      on notes payable                                                                    |                     | (83,777,000         | )                        |                     | (156,603,000        | )                        |                     | (245,760,000        | )                        |
|          Proceeds      from issuance of long-term debt                                                    |                     | 0                   |                     |                     | 0                   |                     |                     | 25,000,000          |                     |
|          Payment      on long-term debt                                                                   |                     | (4,286,000          | )                        |                     | (4,297,000          | )                        |                     | (1,801,000          | )                        |
|          Payment      of dividends                                                                        |                     | (763,000            | )                        |                     | (688,000            | )                        |                     | (984,000            | )                        |
|          Common      stock redemptions                                                                    |                     | (208,000            | )                        |                     | (24,000             | )                        |                     | 0                   |                     |
|                                                                                                                                                   |                          |                     |                     |                          |                     |                     |                          |                     |                     |
| Net cash      provided by (used in) financing activities                                                                                               |                     | 8,718,000           |                     |                     | (16,362,000         | )                        |                     | (11,126,000         | )                        |
|                                                                                                                                                   |                          |                     |                     |                          |                     |                     |                          |                     |                     |
| Net (decrease)      increase in cash and cash equivalents                                                                                              |                     | (1,113,000          | )                        |                     | 1,312,000           |                     |                     | 992,000             |                     |
| Cash and      cash equivalents, beginning of year                                                                                                      |                     | 4,128,000           |                     |                     | 2,816,000           |                     |                     | 1,824,000           |                     |
|                                                                                                                                                   |                          |                     |                     |                          |                     |                     |                          |                     |                     |
| Cash and      cash equivalents, end of period                                                                                                          | $                        | 3,015,000           |                     | $                        | 4,128,000           |                     | $                        | 2,816,000           |                     |
|                                                                                                                                                   |                          |                     |                     |                          |                     |                     |                          |                     |                     |

See accompanying notes to consolidated financial statements.

F-8 

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Back to Contents

**HANOVERFOODS CORPORATION AND SUBSIDIARIESConsolidated Statements of Stockholders’ EquityYears ended May 30, 2004,June 1, 2003 and June 2, 2002**

|                                 |                                        |        | ** **                    |    | **Cumulative**        |   | ** ** | ** **       |    | ****                 |   | ** ** | ** **       |    | ** **        |   | ** ** | ** **       |    | ** **        |   | ** ** | ** ** |   | ** ** | ** **       |   | ** ** | ** **   |    | ** **       |   | ** ** | ** ** |    | ** **               |   | ** **   | ** **            |   | ** ** | ** **             |   |
|--------------------------------------|---------------------------------------------|-------------|-------------------------------|---------|-----------------------|--------|------------|------------------|---------|----------------------|--------|------------|------------------|---------|-------------------|--------|------------|------------------|---------|-------------------|--------|------------|------------|--------|------------|------------------|--------|------------|--------------|---------|------------------|--------|------------|------------|---------|--------------------------|--------|--------------|-----------------------|--------|------------|------------------------|--------|
|                                 |                                        |        | ** **                    |    | ** convertible** |   | ** ** | ** **       |    | **Cumulative ** |   | ** ** | ** **       |    | ** **        |   | ** ** | ** **       |    | ** **        |   | ** ** | ** ** |   | ** ** | ** **       |   | ** ** | ** **   |    | ** **       |   | ** ** | ** ** |    | **Employee Stock Trust** |   | ** **   | ** **            |   |
|                                 |                                        |        | ** **                    |    | **preferred**         |   | ** ** | ** **       |    | **convertible**      |   | ** ** | ** **       |    | ** **        |   | ** ** | ** **       |    | ** **        |   | ** ** | ** ** |   | ** ** | ** **       |   | ** ** | ** **   |    | ** **       |   | ** ** | ** ** |    |                          |   |         | ** Accumulated** |   |
|                                 |                                        |        | **Total**                     |    | **stock Series**      |   | ** ** | ** **       |    | **preferred**        |   | ** ** | ** **       |    | **Common**        |   | ** ** | ** **       |    | **Common**        |   | ** ** | ** ** |   |       | **Capital paid** |   | ** ** | ** **   |    | ** **       |   | ** ** | ** ** |    | ** **               |   | ** **   | ** **            |   |       | ** Other**        |   |
|                                 |                                        |        | ** Stockholders’** |    | **A and B**           |   | ** ** | ** **       |    | **stock Series**     |   | ** ** | ** **       |    | **stock Class A** |   | ** ** | ** **       |    | **stock Class B** |   | ** ** | ** ** |   |       | **in excess of** |   | ** ** | **Retained** |    | **Treasury**     |   | ** ** | ** ** |    | ** **               |   | ** **   | ** **            |   | ** ** | ****Comprehensive****  |   |
|                                 |                                        |        | **equity**                    |    | **Shares**            |   |       | ** Amount** |    | **C Shares**         |   |       | ** Amount** |    | **Shares**        |   |       | ** Amount** |    | **Shares**        |   | ** ** | **Amount** |   | ** ** | **par value**    |   | ** ** | **earnings** |    | **stock Shares** |   | ** ** | **Amount** |    | **Shares**               |   | ** **   | **Amount**            |   |       | **Income (Loss)** |   |
|                                 |                                        |        |                               |    |                       |   |       |                  |    |                      |   |       |                  |    |                   |   |       |                  |    |                   |   |       |            |   |       |                  |   |       |              |    |                  |   |       |            |    |                          |   |         |                       |   |       |                        |   |
| Balance,          June 3, 2001       | $                                           | 77,465,000  |                          | 31,216  |                  | $      | 780,000    |             | 10,000  |                 | $      | 250,000    |             | 349,316 |              | $      | 8,732,000  |             | 635,572 |              | $      | 15,889,000 |       | $      | 15,254,000 |             | $      | 61,273,000 |         | 144,435 |             | $      | (8,148,000 | )          | 142,449 |                     | $      | (16,667,000  | )                     | $      | 102,000    |                   |
|                                 |                                        |        |                               |    |                       |   |       |                  |    |                      |   |       |                  |    |                   |   |       |                  |    |                   |   |       |            |   |       |                  |   |       |              |    |                  |   |       |            |    |                          |   |         |                       |   |       |                        |   |
| Net          earnings                |                                        | 7,271,000   |                          |    |                  |   |       |             |    |                 |   |       |             |    |              |   |       |             |    |              |   |       |       |   |       |             |   | 7,271,000  |         |    |             |   |       |       |    |                     |   |         |                  |   |       |                   |
| Cash          dividends per share:   |                                        |        |                          |    |                  |   |       |             |    |                 |   |       |             |    |              |   |       |             |    |              |   |       |       |   |       |             |   |       |         |    |             |   |       |       |    |                     |   |         |                  |   |       |                   |
|                                 | Preferred – $2.0625          annually |        | (41,000                       | )       | —               |   |       | —          |    | —              |   |       | —          |    | —           |   |       | —          |    | —           |   |       | —    |   |       | —          |   |       | (41,000      | )       | —          |   |       | —    |    | —                  |   |         | —               |   |       | —                |   |
|                                 | Common – $1.10          annually      |        | (943,000                      | )       | —               |   |       | —          |    | —              |   |       | —          |    | —           |   |       | —          |    | —           |   |       | —    |   |       | —          |   |       | (943,000     | )       | —          |   |       | —    |    | —                  |   |         | —               |   |       | —                |   |
| Issuance          of common stock to |                                        |        |                          |    |                  |   |       |             |    |                 |   |       |             |    |              |   |       |             |    |              |   |       |       |   |       |             |   |       |         |    |             |   |       |       |    |                     |   |         |                  |   |       |                   |
|                                 | Employee          Stock Ownership Plan      |        |                          |    |                  |   |       |             |    |                 |   |       |             |    |              |   |       |             |    |              |   |       |       |   |       |             |   |       |         |    |             |   |       |       |    |                     |   |         |                  |   |       |                   |   |
|                                 | Class B 4,258          shares               |        | 480,000                       |    | —               |   |       | —          |    | —              |   |       | —          |    | —           |   |       | —          |    | —           |   |       | —    |   |       | (19,000          | )      |       | —      |    | —          |   |       | —    |    | (4,258                   | )      |         | 499,000               |   |       | —                |   |
| Stock          Conversion            |                                        | —     |                          | (160    | )                     |   | (4,000     | )                | — |                 |   | —    |             | 37      |              |   | 1,000      |             | — |              |   | —    |       |   | 3,000      |             |   | —    |         | — |             |   | —    |       | — |                     |   | —      |                  |   | —    |                   |
| Other          comprehensive loss    |                                        | (241,000    | )                             | — |                  |   | —    |             | — |                 |   | —    |             | — |              |   | —    |             | — |              |   | —    |       |   | —    |             |   | —    |         | — |             |   | —    |       | — |                     |   | —      |                  |   | (241,000   | )                      |
|                                 |                                        |        |                               |    |                       |   |       |                  |    |                      |   |       |                  |    |                   |   |       |                  |    |                   |   |       |            |   |       |                  |   |       |              |    |                  |   |       |            |    |                          |   |         |                       |   |       |                        |   |
| Balance,          June 2, 2002       | $                                           | 83,991,000  |                          | 31,056  |                  | $      | 776,000    |             | 10,000  |                 | $      | 250,000    |             | 349,353 |              | $      | 8,733,000  |             | 635,572 |              | $      | 15,889,000 |       | $      | 15,238,000 |             | $      | 67,560,000 |         | 144,435 |             | $      | (8,148,000 | )          | 138,191 |                     | $      | (16,168,000  | )                     | $      | (139,000   | )                      |
|                                 |                                        |        |                               |    |                       |   |       |                  |    |                      |   |       |                  |    |                   |   |       |                  |    |                   |   |       |            |   |       |                  |   |       |              |    |                  |   |       |            |    |                          |   |         |                       |   |       |                        |   |
| Net earnings                         |                                        | 9,874,000   |                          | — |                  |   | —    |             | — |                 |   | —    |             | — |              |   | —    |             | — |              |   | —    |       |   | —    |             |   | 9,874,000  |         | — |             |   | —    |       | — |                     |   | —      |                  |   | —    |                   |
| Cash          dividends per share:   |                                        |        |                          |    |                  |   |       |             |    |                 |   |       |             |    |              |   |       |             |    |              |   |       |       |   |       |             |   |       |         |    |             |   |       |       |    |                     |   |         |                  |   |       |                   |
|                                 | Preferred – $2.0625          annually |        | (41,000                       | )       | —               |   |       | —          |    | —              |   |       | —          |    | —           |   |       | —          |    | —           |   |       | —    |   |       | —          |   |       | (41,000      | )       | —          |   |       | —    |    | —                  |   |         | —               |   |       | —                |   |
|                                 | Common – $1.10          annually      |        | (647,000                      | )       | —               |   |       | —          |    | —              |   |       | —          |    | —           |   |       | —          |    | —           |   |       | —    |   |       | —          |   |       | (647,000     | )       | —          |   |       | —    |    | —                  |   |         | —               |   |       | —                |   |
| Issuance          of common stock to |                                        |        |                          |    |                  |   |       |             |    |                 |   |       |             |    |              |   |       |             |    |              |   |       |       |   |       |             |   |       |         |    |             |   |       |       |    |                     |   |         |                  |   |       |                   |
|                                 | Employee          Stock Ownership Plan      |        |                          |    |                  |   |       |             |    |                 |   |       |             |    |              |   |       |             |    |              |   |       |       |   |       |             |   |       |         |    |             |   |       |       |    |                     |   |         |                  |   |       |                   |   |
|                                 | Class B 4,761          shares               |        | 544,000                       |    | —               |   |       | —          |    | —              |   |       | —          |    | —           |   |       | —          |    | —           |   |       | —    |   |       | —          |   |       | —      |    | —          |   |       | —    |    | (4,761                   | )      |         | 544,000               |   |       | —                |   |
|                                 | Employee          Stock Trust               |        |                          |    | —               |   |       | —          |    | —              |   |       | —          |    | —           |   |       | —          |    | 13,500            |   |       | 338,000    |   |       | 1,134,000        |   |       | —      |    | —          |   |       | —    |    | 13,500                   |   |         | (1,472,000            | )      |       | —                |   |
| Redemption          of Common Stock  |                                        |        |                          |    |                  |   |       |             |    |                 |   |       |             |    |              |   |       |             |    |              |   |       |       |   |       |             |   |       |         |    |             |   |       |       |    |                     |   |         |                  |   |       |                   |
|                                 | Class B                                     |        | (24,000                       | )       | —               |   |       | —          |    | —              |   |       | —          |    | —           |   |       | —          |    | —           |   |       | —    |   |       | —          |   |       | —      |    | 222              |   |       | (24,000    | )       | —                  |   |         | —               |   |       | —                |   |
| Other          comprehensive loss    |                                        | (480,000    | )                             | — |                  |   | —    |             | — |                 |   | —    |             | — |              |   | —    |             | — |              |   | —    |       |   | —    |             |   | —    |         | — |             |   | —    |       | — |                     |   | —      |                  |   | (480,000   | )                      |
|                                 |                                        |        |                               |    |                       |   |       |                  |    |                      |   |       |                  |    |                   |   |       |                  |    |                   |   |       |            |   |       |                  |   |       |              |    |                  |   |       |            |    |                          |   |         |                       |   |       |                        |   |
| Balance,          June 1, 2003       | $                                           | 93,217,000  |                          | 31,056  |                  | $      | 776,000    |             | 10,000  |                 | $      | 250,000    |             | 349,353 |              | $      | 8,733,000  |             | 649,072 |              | $      | 16,227,000 |       | $      | 16,372,000 |             | $      | 76,746,000 |         | 144,657 |             | $      | (8,172,000 | )          | 146,930 |                     | $      | (17,096,000  | )                     | $      | (619,000   | )                      |
|                                 |                                        |        |                               |    |                       |   |       |                  |    |                      |   |       |                  |    |                   |   |       |                  |    |                   |   |       |            |   |       |                  |   |       |              |    |                  |   |       |            |    |                          |   |         |                       |   |       |                        |   |
| Net earnings                         |                                        | 11,441,000  |                          | — |                  |   | —    |             | — |                 |   | —    |             | — |              |   | —    |             | — |              |   | —    |       |   | —    |             |   | 11,441,000 |         | — |             |   | —    |       | — |                     |   | —      |                  |   | —    |                   |
| Cash          dividends per share:   |                                        |        |                          |    |                  |   |       |             |    |                 |   |       |             |    |              |   |       |             |    |              |   |       |       |   |       |             |   |       |         |    |             |   |       |       |    |                     |   |         |                  |   |       |                   |
|                                 | Preferred – $2.0625          annually |        | (41,000                       | )       | —               |   |       | —          |    | —              |   |       | —          |    | —           |   |       | —          |    | —           |   |       | —    |   |       | —          |   |       | (41,000      | )       | —          |   |       | —    |    | —                  |   |         | —               |   |       | —                |   |
|                                 | Common – $1.10          annually      |        | (722,000                      | )       | —               |   |       | —          |    | —              |   |       | —          |    | —           |   |       | —          |    | —           |   |       | —    |   |       | —          |   |       | (722,000     | )       | —          |   |       | —    |    | —                  |   |         | —               |   |       | —                |   |
| Issuance          of common stock to |                                        |        |                          |    |                  |   |       |             |    |                 |   |       |             |    |              |   |       |             |    |              |   |       |       |   |       |             |   |       |         |    |             |   |       |       |    |                     |   |         |                  |   |       |                   |
|                                 | Employee          Stock Ownership Plan      |        |                          |    |                  |   |       |             |    |                 |   |       |             |    |              |   |       |             |    |              |   |       |       |   |       |             |   |       |         |    | —          |   |       | —    |    | —                  |   |         | —               |   |       | —                |   |
|                                 | Class B 1,708 shares                        |        | 205,000                       |    | —               |   |       | —          |    | —              |   |       | —          |    | —           |   |       | —          |    | —           |   |       | —    |   |       | (7,000           | )      |       | —      |    | —          |   |       | —    |    | (1,708                   | )      |         | 212,000               |   |       | —                |   |
|                                 | Employee Stock Trust                        |        | —                       |    | —               |   |       | —          |    | —              |   |       | —          |    | —           |   |       | —          |    | 199,450           |   |       | 4,986,250  |   |       | 18,548,850       |   |       | —      |    | —          |   |       | —    |    | 199,450                  |   |         | (23,535,100)          |   |       | —                |   |
| Redemption          of Common Stock  |                                        |        |                          |    |                  |   |       |             |    |                 |   |       |             |    |              |   |       |             |    |              |   |       |       |   |       |             |   |       |         |    |             |   |       |       |    |                     |   |         |                  |   |       |                   |
|                                 | Class B                                     |        | (207,000                      | )       | —               |   |       | —          |    | —              |   |       | —          |    | —           |   |       | —          |    | —           |   |       | —    |   |       | —          |   |       | —      |    | 66               |   |       | (207,000   | )       | —                  |   |         | —               |   |       | —                |   |
| Other          comprehensive income  |                                        | 207,000     |                          | — |                  |   | —    |             | — |                 |   | —    |             | — |              |   | —    |             | — |              |   | —    |       |   | —    |             |   | —    |         | — |             |   | —    |       | — |                     |   | —      |                  |   | 207,000    |                   |
|                                 |                                        |        |                               |    |                       |   |       |                  |    |                      |   |       |                  |    |                   |   |       |                  |    |                   |   |       |            |   |       |                  |   |       |              |    |                  |   |       |            |    |                          |   |         |                       |   |       |                        |   |
| Balance,          May 30, 2004       | $                                           | 104,100,000 |                          | 31,056  |                  | $      | 776,000    |             | 10,000  |                 | $      | 250,000    |             | 349,353 |              | $      | 8,733,000  |             | 848,522 |              | $      | 21,213,250 |       | $      | 34,913,850 |             | $      | 87,424,000 |         | 144,723 |             | $      | (8,379,000 | )          | 344,672 |                     | $      | (40,419,100) |                  | $      | (412,000   | )                      |
|                                 |                                        |        |                               |    |                       |   |       |                  |    |                      |   |       |                  |    |                   |   |       |                  |    |                   |   |       |            |   |       |                  |   |       |              |    |                  |   |       |            |    |                          |   |         |                       |   |       |                        |   |

See accompanying notes to consolidated financial statements.

F-9

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Back to Contents

**HANOVER FOODS CORPORATION AND SUBSIDIARIES****Notes to Consolidated Financial Statements**

**Note 1 Summaryof Significant Accounting Policies**

|   | ***(a)***       | ***Description of Business***Hanover Foods    Corporation (the “Company”)    is a vertically integrated processor of food products in one industry segment.    The Company is involved in the growing, processing, canning, freeze-drying,    packaging, marketing, and distribution of its products under its own trademarks    as well as other branded, customer, and private labels primarily to the retail,    foodservice and industrial customers primarily in the Eastern United States    from Maine to Florida. The Company has operations in eleven plants in Pennsylvania,    one plant in Delaware, one plant in Maryland, one plant in New Jersey and    two plants in Guatemala. The Company’s raw materials are readily available    and the Company is not dependent on a single supplier or a few suppliers.    Revenue is recognized when title transfers pursuant to shipping terms. Separately    billed shipping and handling is included in net sales. Shipping and handling    costs are included in cost of goods sold. |
|--------|---------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   | ***(b)***       | ***Principles of Consolidation***The accompanying     consolidated financial statements include the accounts of the Company and     its subsidiaries, which are Consumers Packing Company (T/A Hanover Foods –Lancaster     Division), Spring Glen Fresh Foods, Inc., Bickel’s Snack Foods, Inc.,     Hanover Insurance Company Ltd., Nittany Corporation,  Aunt     Kitty’s Foods, Inc., Tri-Co Foods Corp.     and its subsidiaries –  Sunwise     Corporation and Mayapac S.A., all of which are wholly-owned. All significant     intercompany balances and transactions    have been eliminated.                                                                                                                                                                                                                                                                                                                                                                                                                                       |

|   | ***(c)***       | ***Concentration of Credit Risk***Financial instruments that potentially subject the Company to credit risk consist of trade receivables. Wholesale and retail food distributors comprise a significant portion of the trade receivables; collateral is not required. The risk associated with the concentration is generally limited due to the large number of wholesalers and retailers and their geographic dispersion, however, the Company’s ten largest customers accounted for approximately 36%, 38%, and 36%, of the Company’s net sales for the years ended May 30, 2004, June 1, 2003 and June 2, 2002, respectively. The Company’s ten largest customers account for approximately 38% and 30% of the Company’s accounts receivable as of May 30, 2004 and June 1, 2003 respectively. No single customer accounted for more than 10% of net sales for the years ended May 30, 2004, June 1, 2003 and, June 2, 2002. |
|--------|---------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

F-10

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**HANOVER FOODS CORPORATION AND SUBSIDIARIES****Notes to Consolidated Financial Statements**

**Note 1 Summaryof Significant Accounting Policies (Cont’d)**

|   | ***(d)***       | ***Cash and Cash Equivalents***Cash equivalents     of $3,015,000 as of May 30, 2004 and $4,128,000 as of June 1, 2003, respectively,     consist of short-term interest-bearing investments with maturities of less     than three months. For purposes of the statements of cash flows, the Company     considers all highly liquid debt instruments with original maturities of     three months or less to be cash equivalents. |
|--------|---------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | ***(e)***       | ***Trade Accounts Receivable***    Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The company determines the allowance based on historical write-off experience.                                                       |
|   |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | ***(f)***       | ***Fair Value of Financial Instruments***The carrying value of cash and cash equivalents, accounts and notes receivable, accounts payable and notes payable approximates fair values due to the short-term maturities of these instruments.                                                                                                                                                                                         |
|   |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                      | The      fair values of each of the Company’s long-term debt instruments are      based on the amount of future cash flows associated with each instrument      discounted using the Company’s current borrowing rate for similar      debt instruments of comparable maturity. The amount reported in the consolidated    balance sheet for long-term debt approximates fair value.                                      |

|   |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------|---------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | ***(g)***       | ***Inventories***Inventories are stated at the lower of cost (determined by average cost which approximates the first-in, first-out method) or market.                                                                                                                                                                                                                                                                                                                                                                     |
|   |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | ***(h)***       | ***Property, Plant, and Equipment***Property, plant, and equipment are stated at cost. Expenditures for maintenance and repairs are expensed as incurred; additions and betterments that materially increase the lives of the related assets are capitalized. Upon retirement, sale, or other disposition of buildings and equipment, cost and accumulated depreciation are eliminated from the accounts and gain or loss is included in operations.                                                                       |
|   |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                      | Depreciation      on property, plant, and equipment is calculated on the straight-line method      over the estimated useful lives of the assets. Estimated useful lives range      from approximately 3 years to 12 years for equipment and up to 40 years      for buildings. Accelerated methods are used for tax reporting purposes.      Plant and equipment held under capital leases are amortized using the straight-line      method over the shorter of the lease term or estimated useful life of the    asset. |

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**HANOVER FOODS CORPORATION AND SUBSIDIARIES****Notes to Consolidated Financial Statements**

| **Note    1****Summary    of Significant Accounting Policies (Cont’d)** |
|------------------------------------------------------------------------------|
|                                                                         |   |   |
|                                                                         | ***(i)*** | ***Goodwill    and Intangible Assets*** |

|   |   | On June        3, 2002, the Company adopted the provisions of Statement of Financial        Accounting Standards (“SFAS”) No.142 “Goodwill and Other        Intangible Assets”. In connection with this adoption, the Company        performed an initial impairment test of the goodwill and discontinued        amortization of goodwill. The initial valuation did not indicate any        impairment of the goodwill. Additionally, the SFAS requires the Company        to perform an annual impairment test of the goodwill. The Company has        chosen March 1 as the date to perform the annual impairment test of goodwill.    The March 1 impairment test did not indicate any impairment. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |      | Intangible        assets consist of the Company’s trademarks. The trademarks were        determined to have an indefinite life and are not amortized. In accordance        with SFAS No. 142, “Goodwill and Other Intangible Assets”,        the Company will perform an annual review of its trademarks to determine        whether impairments exists. As of May 30, 2004, the Company did not recognize    any impairment charges related to these trademarks.                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--------|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | ***(j)*** | ***Impairment    of Long-Lived Assets*********                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |      | Long-lived        assets, such as property, plant and equipment, and purchased intangibles        subject to amortization, are reviewed for impairment whenever events        or changes in circumstances indicate that the carrying amount of an asset        may not be recoverable. Recoverability of assets to be held and used        is measured by a comparison of the carrying amount of an asset to estimated        undiscounted future cash flows expected to be generated by the asset.        If the carrying amount of an asset exceeds its estimated future cash        flows, an impairment charge is recognized by the amount by which the        carrying amount of the asset exceeds the fair value of the asset. Assets        to be disposed of are reported at the lower of the carrying amount or    fair value less costs to sell. At the time of sale the depreciation ceases. |
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |      | Goodwill        and intangible assets not subject to amortization are tested annually        for impairment. An impairment loss is recognized to the extent that the    carrying amount exceeds the asset’s fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | ***(k)*** | ***Insurance***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |      | The Company,        through its wholly-owned insurance subsidiary, is self-insured with respect        to certain general liability and workers’ compensation claims. Excess        insurance coverage is maintained for general liability and workers’ compensation    claims.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |      | Outstanding        claims include a provision for claims reported as advised to the Company        by the primary insurer and a provision for incurred but not reported        claims based upon the advice of the primary insurer on the ultimate liability        of the Company under the reinsurance assumed or, in the absence of such        an evaluation, the provision is based upon the best estimate of the ultimate    liability of the Company.******                                                                                                                                                                                                                                                                                                                                                                                                                                      |

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**HANOVERFOODS CORPORATION AND SUBSIDIARIES****Notes to Consolidated Financial Statements**

| **Note    1****Summary    of Significant Accounting Policies (Cont’d)** |
|------------------------------------------------------------------------------|
|                                                                         |   |   |
|                                                                         | ***(l)*** | ***Income    Taxes*** |
|                                                                         |   |   |
|                                                                         |   | Income        taxes are accounted for under the asset and liability method. Deferred        tax assets and liabilities are recognized for the future tax consequences    attributable to differences between the financial statement carrying amounts        of existing assets and liabilities and their respective tax bases and        operating loss and tax credit carryforwards. Deferred tax assets and        liabilities are measured using enacted tax rates expected to apply to        taxable income in the years in which those temporary differences are        expected to be recovered or settled. The effect on deferred tax assets        and liabilities of a change in tax rates is recognized in income in the        period that includes the enactment date. Earnings of foreign operations        are reinvested in the business and no provision for domestic income tax    or foreign withholding tax is made on such earnings until distributed. |
|                                                                         |   |   |
|                                                                         | ***(m)*** | ***Research    and Development*** |
|                                                                         |   |   |
|                                                                         |   | Research        and development costs are expensed as incurred. Research and development        costs amounted to $633,000, $608,000, and $600,000, for the years ended    May 30, 2004, June 1, 2003 and June 2, 2002, respectively. |
|                                                                         |   |   |
|                                                                         | ***(n)*** | ***Promotional    Costs*** |
|                                                                         |   |   |
|                                                                         |   | Promotional        costs are expensed as incurred. Accounts and notes receivable are presented    net of allowances for bad debts and promotional programs. |
|                                                                         |   |   |
|                                                                         | ***(o)*** | ***Advertising    Costs*** |
|                                                                         |   |   |
|                                                                         |   | Advertising        costs are expensed as incurred. Advertising expenses amounted to $714,000,        $730,000, and $724,000, for the years ended May 30, 2004, June 1, 2003    and June 2, 2002, respectively. |
|                                                                         |   |   |
|                                                                         | ***(p)*** | ***Earnings    per Share*** |
|                                                                         |   |   |
|                                                                         |   | Earnings        per share are computed in accordance with SFAS No. 128, “Earnings        per Share”*.*Basic        earnings per share excludes dilution and is computed by dividing income        available to common stockholders by the weighted-average number of common        shares outstanding for the period. Diluted earnings per share reflects        the potential dilution that could occur if securities or other contracts        to issue common stock were exercised or converted into common stock or        resulted in the issuance of common stock that then shared in the earnings    of the entity. |
|                                                                         |   |   |
|                                                                         | ***(q)*** | ***Fiscal    Year End*** |
|                                                                         |   |   |
|                                                                         |   | The Company’s        fiscal year ends at the close of operations on the Sunday nearest to        May 31. The fiscal years ended May 30, 2004 and June 1, 2003 and June    2, 2002 were comprised of 52 weeks. |
|                                                                         |   |   |
|                                                                         | ***(r)*** | ***Use    of Estimates*** |
|                                                                         |   |   |
|                                                                         |   | Management        of the Company has made a number of estimates and assumptions relating        to the reporting of assets, liabilities, revenues and expenses, and the        disclosure of contingent assets and liabilities to prepare these financial        statements in conformity with generally accepted accounting principles.    Actual results could differ from those estimates. |

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**HANOVERFOODS CORPORATION AND SUBSIDIARIES****Notes to Consolidated Financial Statements**

| **Note    1****Summary    of Significant Accounting Policies (Cont’d)** |
|------------------------------------------------------------------------------|
|                                                                         |   |   |
|                                                                         | ***(s)*** | ***Accounting    for Stock-Based Compensation*** |
|                                                                         |   |   |
|                                                                         |   | The Company        applies the intrinsic value method in accordance with Accounting Principles        Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”,        and related interpretations in accounting for our stock-based compensation        plans. Accordingly, no compensation expense has been recognized for stock-based        compensation plans. Had compensation expense for all stock and employee        stock purchase plans been determined based upon the fair value at the        grant date for awards under these plans consistent with the methodology        prescribed under SFAS No. 123, “Accounting for Stock-Based Compensation”,        as amended, our net (loss) income and (loss) earnings per share would    have been adjusted to the pro forma amounts as follows: |

|   |                                                                                                                                                     |   |       |   |   |      |   |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|--------|--------|-----------|--------|
|   |                                                                                                                                                     |   | **2004**   |   |   | **2003**  |   |
|   |                                                                                                                                                     |   |            |   |   |           |   |
|   | Net Income – as reported                                                                                                                            | $      | 11,441,000 |   | $      | 9,874,000 |   |
|   |                                                                                                                                                     |   |       |   |   |      |   |
|   | Deduct:    Total stock-based employee compensation expense    determined    under fair value based     methods for all awards,net of related tax effects |   | 784,000    |   |   | 81,000    |   |
|   |                                                                                                                                                     |   |            |   |   |           |   |
|   | Pro forma net income                                                                                                                                     | $      | 10,657,000 |   | $      | 9,793,000 |   |
|   |                                                                                                                                                     |   |       |   |   |      |   |
|   | Earnings per share:                                                                                                                                      |   |       |   |   |      |   |
|   |    Basic –      as       reported                                                                                                    | $      | 15.74      |   | $      | 13.64     |   |
|   |    Basic – pro forma                                                                                                                 | $      | 14.72      |   | $      | 13.53     |   |
|   |                                                                                                                                                     |   |       |   |   |      |   |
|   | Diluted – as reported                                                                                                                               | $      | 15.51      |   | $      | 13.46     |   |
|   | Diluted – pro forma                                                                                                                                 | $      | 14.45      |   | $      | 13.29     |   |

|   |      |                                                                                                                     |
|--------|-----------|--------------------------------------------------------------------------------------------------------------------------|
|   | ***(t)*** | ***Reclassifications***                                                                                                  |
|   |      |                                                                                                                     |
|   |      | Certain        amounts in prior periods have been reclassified to conform to classification    made in the current year. |

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**HANOVER  FOODS CORPORATION AND SUBSIDIARIES****Notes  to Consolidated Financial Statements**

**Note  2 Goodwill and Other Intangible Assets**

Amortization expense related to goodwill and other intangible assets was $115,000 for June 2, 2002. The following table reconciles previously reported net income as if the provisions of SFAS No. 142 were in effect in the fiscal year ended June 2, 2002.

|   |                                                    |   | **2002**  |   |
|--------|---------------------------------------------------------|--------|-----------|--------|
|        |                                                         |
|   | Reported      net income                                | $      | 7,271,000 |   |
|   |    Add      back: Goodwill Amortization  |   | 75,000    |   |
|   |    Add      back: Trademark Amortization |   | 40,000    |   |
|   |                                                    |        |           |   |
|   |    Adjusted      net income              |   | 7,386,000 |   |
|   |                                                    |        |           |   |
|   |                                                    |   |      |   |
|   | Basic Earnings      per share:                          |   |      |   |
|   | Reported      net income                                | $      | 10.10     |   |
|   |    Add      back: Goodwill Amortization  |   | .10       |   |
|   |    Add      back: Trademark Amortization |   | .06       |   |
|   |                                                    |        |           |   |
|   | Adjusted      net income                                |   | 10.26     |   |
|   |                                                    |        |           |   |
|   |                                                    |   |      |   |
|   | Diluted      earnings per share:                        |   |      |   |
|   | Reported      net income                                | $      | 9.97      |   |
|   |    Add      back: Goodwill Amortization  |   | .10       |   |
|   |    Add      back: Trademark Amortization |   | .05       |   |
|   |                                                    |        |           |   |
|   | Adjusted      net income                                |   | 10.12     |   |
|   |                                                    |        |           |   |

**Note  3 Notes Payable – Banks**

The Company maintains short-term unsecured lines of credit with various banks providing credit availability amounting to $50,000,000, of which $21,609,000 was borrowed (including an overdraft of $3,081,000) at May 30, 2004 and $7,634,000 was borrowed (including an overdraft of $892,000) at June 1, 2003. The Company borrows funds under these lines of credit under two methods of cost of funds. The first method used to price the cost of short-term borrowings is based upon LIBOR plus thirty-five to one hundred twenty-five basis points. The second method is based upon the financial institution’s “calculated cost of funds” plus an earnings modification. The weighted-average interest rate on short-term borrowings at May 30, 2004 and June 1, 2003, was 1.88% and 2.29%, respectively. The maximum amount of borrowings outstanding under short-term lines of credit at any one time during the years ended May 30, 2004, June 1, 2003, and June 2, 2002, was approximately $20,823,125, $26,848,000, and $55,513,000.

The Corporation’s sources of liquidity are primarily funds from operations and available amounts under seasonal lines of credit expiring (two of which expire on October 31, 2004 and one which expires January 28, 2005), which are expected to be renewed in the ordinary course of business. 

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**HANOVER  FOODS CORPORATION AND SUBSIDIARIES****Notes  to Consolidated Financial Statements**

**Note  4 Long-term Debt**

The long-term debt of the Company and its subsidiaries consists of: 

|   |                                                          |   | **May      30, 2004** |   |   | **June      1, 2003** |   |
|--------|---------------------------------------------------------------|--------|-----------------------|--------|--------|-----------------------|--------|
|   |                                                          |   |                       |   |   |                       |   |
|   | 8.74% unsecured      senior notes payable to                  |   |                  |   |   |                  |   |
|   |    an      insurance company, due through 2007 | $      | 5,357,000             |   | $      | 7,143,000             |   |
|   |                                                          |   |                  |   |   |                  |   |
|   | 7.01% unsecured      senior notes payable to                  |   |                  |   |   |                  |   |
|   |    an      insurance company, due through 2011 |   | 20,000,000            |   |   | 22,500,000            |   |
|   |                                                          |   |                       |   |   |                       |   |
|   |                                                          |   |                  |   |   |                  |   |
|   | Total long-term      debt                                     |   | 25,357,000            |   |   | 29,643,000            |   |
|   | Less current      maturities                                  |   | (4,286,000            | )      |   | (4,286,000            | )      |
|   |                                                          |   |                       |   |   |                       |   |
|   | Long-term      debt, excluding current maturities             | $      | 21,071,000            |   | $      | 25,357,000            |   |
|   |                                                          |   |                       |   |        |                       |   |

The term loan agreements with the insurance company and seasonal borrowing with financial institutions (note 3), contain various restrictive provisions including those relating to mergers and acquisitions, additional borrowing, guarantee of obligations, lease commitments, limitations to declare or pay dividends, repurchase stock, and the maintenance of working capital and certain financial ratios and change in control. Based on the requirements of the agreements at May 30, 2004, $38,576,000 of retained earnings are restricted from distribution. The Company was in compliance with the restrictive provisions in the agreements as of May 30, 2004. 

The aggregate long-term debt maturities follow: 

|   |   **For    the fiscal year ending:** |    |       |   |
|--------|-------------------------------------------|---------|------------|--------|
|   |                                      |    |       |   |
|   | 2005                                      | $  | 4,286,000  |   |
|   | 2006                                      |    | 4,286,000  |   |
|   | 2007                                      |    | 4,285,000  |   |
|   | 2008                                      |    | 2,500,000  |   |
|   | 2009                                      |    | 2,500,000  |   |
|   | Thereafter                                |    | 7,500,000  |   |
|   |                                      |    |            |   |
|   |                                      |    |       |   |
|   | Total                                     | $       | 25,357,000 |   |
|   |                                      |    |            |   |

**Note  5 Leases**

The Company has several noncancelable operating leases, primarily for equipment, that expire over the next five years. These leases generally contain renewal options for periods ranging from three to five years and require the Company to pay all executory costs such as maintenance and insurance. Rental expense for operating leases (except those with lease terms of a month or less that were not renewed) during the periods ended May 30, 2004, June 1, 2003, and June 2, 2002, amounted to $2,544,000, $1,918,000, and $3,042,000, respectively. 

Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of May 30, 2004 are: 

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**HANOVER  FOODS CORPORATION AND SUBSIDIARIES****Notes  to Consolidated Financial Statements**

**Note  5 Leases (Cont’d)**

|       | **For      the fiscal year ending:** |   | **Operating** |   |
|------------|--------------------------------------|--------|---------------|--------|
| **leases** |
|       |                                 |        |
|       |    2005               | $      | 808,000       |   |
|       |    2006               |   | 509,000       |   |
|       |    2007               |   | 316,000       |   |
|       |    2008               |   | 77,000        |   |
|       |    2009               |   | 7,000         |   |
|       |                                 |   |               |   |
|       | Total minimum      lease payments    | $      | 1,717,000     |   |
|       |                                 |   |               |   |

**Note  6 Capital Stock**

The Company’s capital stock consists of Class A Nonvoting Common Stock, Class B Voting Common Stock, 8 1/4% Series A and B Cumulative Convertible Preferred Stock, and 4.4% Series C Cumulative Convertible Preferred Stock. Holders of Class B Common Stock have one vote per share. No other classes of stock have voting rights except as discussed below. 

The Company’s Amended and Restated Articles of Incorporation authorize the Board of Directors to issue up to 10,000 shares of Series C Convertible Preferred Stock to the Company’s 401(k) Savings Plan Trust. At least a majority of the trustees of the Company’s 401(k) Savings Plan (or similar employee benefit plan), who are appointed by the Board of Directors, must be “disinterested directors” of the Company. If certain Warehime family Class B shareholders cannot unanimously agree in writing on the composition of the Board of Directors or on other important matters specified below, the Amended and Restated Articles permit each of the 10,000 shares of Series C Convertible Preferred Stock the right to cast 35 votes in the election of directors, and each share of Class A Common Stock would have one-tenth (1/10) of a vote per share, thereby enabling them to influence the ultimate result of the election by the Class B shareholders. The Amended and Restated Articles also permit the trustees and the Class A shareholders to similarly vote on proposals to remove directors, and in connection with any proposal (not previously approved by the Board of Directors) to further amend the Articles of Incorporation or Bylaws or to effectuate a merger, consolidation, division, or sale of substantially all of the assets of the Company. The voting power of the Series C Convertible Preferred Stock ceased in January 2003. Under the Amended and Restated Articles, each of the shares of Series C Convertible Preferred Stock is convertible into one share of Class A Common Stock and is not entitled to vote except in the event that certain Warehime family Class B shareholders cannot agree in writing on the composition of the Board of Directors or on other important matters specified above. 

During fiscal       year 2001, the Corporation established an Employee Stock Trust (the “Trust”)        to fund future stock related and other obligations of the Corporation’s         compensation and benefit plans, including a concurrently established        Employee    Stock Ownership Plan (“ESOP”). For financial reporting purposes,     the Trust is consolidated with the Corporation. On March 1, 2001, the Corporation      contributed 142,449 shares of Class B Common Stock to the Trust. Upon contribution,    these shares were recorded at a fair value of $117 per share based upon the      most recent appraised value of Class B Common Stock as determined by an     independent    valuation. During the years ended May 30, 2004, June 1, 2003 and June 2,     2002  the Company transferred 1,708, 4,761 and 4,258 shares of Class B Common     Stock    to the ESOP respectively, which do not include shares issued as a result of the payment of quarterly dividends of $0.275 per share of Class B Common Stock. The shares had a fair marketvalue     of approximately $120, $114 and $112 on the respective transfer dates and    accordingly, the Company recorded a charge to earnings of approximately $205,000,     $544,000 and $480,000 respectively. 

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**HANOVER  FOODS CORPORATION AND SUBSIDIARIES****Notes  to Consolidated Financial Statements**

**Note  6 Capital Stock (Cont’d)**

On June 20,    2002, the Corporation’s Board of Directors adopted the 2002 Stock Option Plan.  34,600 shares of the Corporation’s Class B Common Stock, par value $25.00 per share, are authorized for issuance under the 2002 Stock Option Plan, and options to purchase 13,500 shares were granted during fiscal year 2003 with weighted-average exercise price of $110 per share.   Options vest at the rate of 12.50% per year beginning June 20, 2004 and June 20 of each following year up to and including June 20, 2011.  All officers and key employees of the Corporation and of any present or future parent or subsidiary of the Corporation are eligible to receive options under the 2002 Stock Option Plan, excluding John A. Warehime.  No individual mayreceive options under the 2002 Stock Option Plan for more than 15% of the total number of shares of the Corporation’sClass B Common Stock authorized for issuance under the 2002 Stock Option Plan.

On June 20, 2002,  the Corporation contributed 13,500 shares of Class B Common Stock to the Trust  for the purpose of funding stock options under the 2002 Stock Option Plan to  officers and key employees of the Corporation. Upon contribution, these shares  were recorded at a fair value of $110 per share based upon the most recent appraised  value as determined by an independent valuation. 

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**HANOVER  FOODS CORPORATION AND SUBSIDIARIES****Notes  to Consolidated Financial Statements**

**Note  6 Capital Stock (Cont’d)**

The following summarizes the Company’s capital stock at May 30, 2004 and June 1, 2003:

|                                                                                                             | **May      30, 2004** |   | **June      1, 2003** |   |
|------------------------------------------------------------------------------------------------------------------|-----------------------|--------|-----------------------|--------|
|                                                                                                             |                       |   |                       |   |
|                                                                                                             | **Issued**            |   | **Outstanding**       |   | **Issued** |   | **Outstanding** |   |
|                                                                                                             |                       |   |                       |   |  |   |  |   |
| Series A      8 1/4% cumulative convertible preferred stock – $25 Par value, 60,000      shares authorized  | 14,948                |   | 6,228                 |   | 14,948 |   | 6,228 |   |
|                                                                                                             |                  |   |                  |   |   |   |   |   |
| Series B      8 1/4% cumulative convertible preferred stock – $ 25 Par value, 60,000      shares authorized | 16,108                |   | 8,336                 |   | 16,108 |   | 8,336 |   |
|                                                                                                             |                  |   |                  |   |   |   |   |   |
| Series C      4.4% cumulative convertible preferred stock – $25 par value, 10,000      shares authorized    | 10,000                |   | 10,000                |   | 10,000 |   | 10,000 |   |
|                                                                                                             |                  |   |                  |   |   |   |   |   |
| Class A      nonvoting common stock – $25 par value, 800,000 shares authorized                         | 349,353               |   | 287,996               |   | 349,353 |   | 288,062 |   |
|                                                                                                             |                  |   |                  |   |   |   |   |   |
| Class B      voting common stock – $25 par value, 880,000 shares  authorized                      | 848,522               |   | 781,648               |   | 649,072 |   | 582,198 |   |
|                                                                                                             |                  |   |                  |   |   |   |   |   |

At any time, theholders of the Series A and B Cumulative Convertible Preferred Stock have theoption to convert their shares to shares of Class A Nonvoting Common Stock basedon the book value of the Class A Nonvoting Common Stock at the time of conversion.At May 30, 2004, 5.62 shares of Series A or B Preferred Stock could be convertedinto one share of Class A Common Stock. 

**Note  7 Related Party Transactions**

The Company and its subsidiaries, in the normal course of business, purchase and sell goods and services to related parties. Transactions with related parties are summarized below: 

|             |                                          |     | **Year      ended** |     |   | **Year      ended** |     |   | **Year      ended** |     |
|------------------|---------------------------------------------------------|--------------------|---------------------|--------------------|--------|---------------------|--------------------|--------|---------------------|--------------------|
| **May      30,** | **June      1,**                                        | **June      2,**   |
| **2004**         | **2003**                                                | **2002**           |
|             |                                                    |                    |                     |               |        |                     |               |        |                     |               |
|             | Revenues:                                               |               |                |               |   |                |               |   |                |               |
|             |    Park      100 Foods, Inc.             | $                  | 1,321,000           |               | $      | 1,877,000           |               | $      | 1,555,000           |               |
|             | Expenditures:                                           |               |                |               |   |                |               |   |                |               |
|             |    Lippy      Brothers, Inc.             |               | 1,108,000           |               |   | 1,146,000           |               |   | 1,158,000           |               |
|             |    Warehime      Enterprises, Inc.       |               | 4,000               |               |   | 4,000               |               |   | 81,000              |               |
|             |    John      A. and Patricia M. Warehime |               | 45,000              |               |   | 58,000              |               |   | 49,000              |               |
|             |    Park      100 Foods, Inc.             |               | 19,000              |               |   | 12,000              |               |   | 25,000              |               |
|             |    Schaier      Travel                   |               | 0                   |               |   | 3,000               |               |   | 10,000              |               |
|             | Accounts      receivable:                               |               |                |               |   |                |               |   |                |               |
|             |    Park      100 Foods, Inc.             |               | 275,000             |               |   | 163,000             |               |   | 164,000             |               |
|             |    Lippy      Brothers, Inc.             |               | 0                   |               |   | 0                   |               |   | 3,000               |               |
|             | Accounts      payable:                                  |               |                |               |   |                |               |   |                |               |
|             |    Park      100 Foods                   |               | 0                   |               |   | 7,000               |               |   | 0                   |               |
|             |    Lippy      Brothers, Inc.             |               | 32,000              |               |   | 0                   |               |   | 0                   |               |

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**HANOVER  FOODS CORPORATION AND SUBSIDIARIES****Notes  to Consolidated Financial Statements**

**Note  7 Related Party Transactions (Cont’d)**

Included in other assets is a related party receivable of $1,183,000 in 2004 and $1,030,000 in 2003 related to two split interest life insurance contracts on the life of Patricia M. Warehime. 

In connection with the amended complaint filed by Michael A. Warehime versus John A. Warehime (note 10), pursuant to applicable state law, the Company has agreed to pay directly all expenses (including attorney’s fees) and costs in advance of the final disposition of the litigation or any substantially similar or related action, suit, or proceeding. The Company has received an undertaking from John A. Warehime to repay all costs and expenses if it is ultimately determined that he is not entitled to be indemnified by the Company. The amount paid and expensed by the Company under this arrangement for the years ended May 30, 2004, June 1, 2003 and June 2, 2002, was approximately $0, $365, and $65,000, respectively. 

A portion of rental expense included in note 5 was paid to Park 100 Foods, Inc. and Warehime Enterprises, Inc. The amounts were $20,000, $14,000, and $15,000, for the years ended May 30, 2004, June 1, 2003, and June 2, 2002, respectively.

****During fiscal year 2003, the Corporation via its Guatemalan subsidiary, sold its condominium real estate, located in Naples, Florida to John A. and Patricia M. Warehime for $127,500, which approximates fair value. 

**Note  8 Benefit Plans**

|   | ***(a)*** | ***Defined      Contribution Plan***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--------|-----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |      | ******The      Company offers a 401(k) plan covering certain of its employees. The Company      contributes an amount equal to 100% of each employee’s salary deferral      up to 5% of the employee’s annual salary. Effective July 25, 1997,      the plan was amended to permit matching contributions to be made in cash      and/or securities of the Company (see note 6). The Company’s contribution      to the 401(k) plan for the years ended May 30, 2004, June 1, 2003, and June      2, 2002, was $903,000, $694,000, and $759,000, respectively. |
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | ***(b)*** | ***Pension      Plan***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |      | The      Company offers pension benefits to eligible employees who are members of      the United Food and Commercial Workers Union 56 at its Vineland NJ plant.                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | ***(c)*** | ***Postretirement      Benefits other than Pensions***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |      | Certain      employees receive postretirement benefits other than pensions. This plan      is currently not funded. The Company accounts for these costs by accruing      for them over the employee service period. The status of the plan, based      on the most recent measurement dates, is as follows:                                                                                                                                                                                                                                                                  |

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**HANOVER FOODS CORPORATION AND SUBSIDIARIES****Notes to Consolidated Financial Statements**

**Note 8 Benefit Plans (Cont’d)**

|   |                             |                                           |                                     | **May    30,** |       | **June 1,** |       |
|--------|----------------------------------|------------------------------------------------|------------------------------------------|----------------|------------|-------------|------------|
|   |                             |                                           |                                     | **2004**       |       | **2003**    |       |
|   |                             |                                           |                                     |                |            |        |            |   |
|   | Change    in benefit obligation: |                                           |                                     |           |       |        |       |
|   |                             | Benefit obligation at beginning of year        | $                                        | (7,817,000     | )          | $           | (4,599,000 | ) |
|   |                             | Service cost                                   |                                     | (203,000       | )          |        | (126,000   | ) |
|   |                             | Interest cost                                  |                                     | (453,000       | )          |        | (405,000   | ) |
|   |                             | Amortization of transition obligation          |                                     | (73,000        | )          |        | (73,000    | ) |
|   |                             | Plan assumptions                               |                                     | (1,055,000     | )          |        | (1,790,000 | ) |
|   |                             | Change in plan                                 |                                     | 1,249,000      |       |        | (1,062,000 | ) |
|   |                             | Benefits paid                                  |                                     | (300,000       | )          |        | (238,000   | ) |
|   |                             | Other                                          |                                     | 0              |       |        | 0          |   |
|   |                             |                                           |                                     |                |            |        |            |  |   |
|   |                             |                                           | Benefit obligation at end of year        |           | (8,052,000 | )           |       | (7,817,000 | ) |
|   |                             |                                           |                                     |                |            |        |            |  |   |
|   | Change    in plan assets         |                                           |                                     |           |       |        |       |
|   |                             | Fair value of plan assets at beginning of year |                                     | —         |       |        | —     |   |
|   |                             | Contributions                                  |                                     | 300,000        |       |        | 238,000    |   |
|   |                             | Benefits paid                                  |                                     | (300,000       | )          |        | (238,000   | ) |
|   |                             |                                           |                                     |                |            |        |            |  |   |
|   |                             |                                           | Fair value of plan assets at end of year |           | —     |        |       | — |   |
|   |                             |                                           |                                     |                |            |        |            |  |   |
|   | Funded    status:                |                                           |                                     |           |       |        |       |
|   |                             | Unrecognized net loss                          |                                     | 4,013,000      |       |        | 4,333,000  |   |
|   |                             | Unrecognized prior service cost                |                                     | 156,000        |       |        | 173,000    |   |
|   |                             | Unrecognized net transition obligation    |                                     | 716,000        |       |        | 789,000    |   |
|   |                             |                                           |                                     |                |            |        |            |  |   |
|   |                             | Accrued postretirement benefit cost            | $                                        | (3,167,000     | )          | $           | (2,522,000 | ) |
|   |                             |                                           |                                     |                |            |        |            |  |   |

A discount rate of 6.00% for May 30, 2004 and 6.25% for June 1, 2003, was used in determining the actuarial present value of the accumulated postretirement benefit obligation. 

The cost of postretirement benefits other than pensions consisted of the following components: 

|   |                                  | **Year ended** |    | **Year ended** |   | **Year ended** |   |
|--------|---------------------------------------|----------------|---------|----------------|--------|----------------|--------|
|   |                                  | **May 30,**    |    | **June 1,**    |   | **June 2,**    |   |
|   |                                  | **2004**       |    | **2003**       |   | **2002**       |   |
|   |                                  |                |         |           |        |                |   |  |  |   |
|   | Service cost                          | $              | 126,000 |           | $      | 126,000        |   | $ | 115,000 |   |
|   | Interest cost                         |           | 453,000 |           |   | 405,000        |   |   | 347,000 |   |
|   | Amortization of transition obligation |           | 73,000  |           |   | 73,000         |   |   | 73,000 |   |
|   | Other amortization and deferral       |           | 215,000 |           |   | 147,000        |   |   | 131,000 |   |
|   |                                  |                |         |           |        |                |   |  |  |   |
|   |                                  | $              | 867,000 |           | $      | 751,000        |   | $ | 666,000 |   |
|   |                                  |                |         |           |        |                |   |  |  |   |

The assumed postretirement health care cost trend rates in measuring the accumulated post retirement obligation was as follows:

|   | • | Medical:        6.5% in 2002, decreasing by .5% per year to an ultimate rate of 5.0%    in 2005 and later            |
|--------|---------|----------------------------------------------------------------------------------------------------------------------|
|   | • | Prescription        Drugs: 8.0% in 2002, decreasing by .5% per year to an ultimate rate of    5.0% in 2008 and later |
|   | • | Dental:    4.0% in 2002 and later                                                                                    |

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**HANOVER FOODS CORPORATION AND SUBSIDIARIES****Notes to Consolidated Financial Statements**

**Note 8 Benefit Plans (Cont’d)**

|   |      | The        health care cost trend rate assumption has a significant effect on the        amounts reported. For example, increasing the assumed health care cost        trend rates by one percentage point in each year would increase the accumulated        postretirement benefit obligation as of February 29, 2004 by $1,569,000        and the aggregate of the service and interest cost components of net        periodic postretirement benefit cost for the year ended February 29,    2004 by $152,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | ***(d)*** | ***Employment    and Deferred Compensation Agreements***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |      | On        June 12, 1995, the Company entered into a five-year employment agreement        with its Chief Executive Officer, John A Warehime, at an annual base        salary of $650,000 with such compensation payable retroactively from        April 1, 1994 (the “1995 Employment Agreement”). The 1995 Employment        Agreement was amended on February 13, 1997 (“Amended Employment        Agreement”). The principal terms of Mr. Warehime’s employment        arrangements with the Company as amended by the Amended Employment Agreement    are set forth below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |      | The        Amended Employment Agreement provides for annual increases (but not decreases)        in the employee’s annual salary equal to the greater of 5% of the        prior year’s salary or the annual percentage increase in the Consumer        Price Index (CPI). Mr. Warehime’s annual base salary for fiscal        2004, 2003 and 2002 was $773,950, $737,000, and $702,000, respectively.        Unless terminated by either party, the Amended Employment Agreement automatically        renews annually on each anniversary date so that five years always remain        on the term of the agreement. In the event the employee is terminated        without cause, or in the event the employee terminates his employment        after a reduction (without his written consent) of his duties or authority,        compensation, or similar events, the Amended Employment Agreement provides        for the payment of the salary and bonus (including all other benefits)        over the remaining term of the agreement. In the event of termination        due to death or disability, the Amended Employment Agreement provides        for the same payment to the employee (or in the event of the death of        the employee, his spouse, or descendants) for one year and thereafter        the payment of supplemental pension benefits as described below. In addition,        the Amended Employment Agreement provides for the reimbursement by the        Company of the employee’s legal and accounting fees up to $75,000        per year and reasonable business expenses incurred by the employee in        connection with the business of the Company. The Amended Employment        Agreement also provides the employee with various other benefits including    the use of an automobile, disability and life insurance, and a club membership. |
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |      | The        annual bonus payable to the employee under the Amended Employment Agreement        is equal to $100,000 plus 10% of the Company’s pretax earnings over        $5.0 million provided that no annual bonus is payable if pretax earnings        of the Company are less than $5.0 million. The Amended Employment Agreement        limits salary and the annual bonus payment described above to an aggregate        of not more than $1.0 million annually. Annual bonuses can be paid in        cash or Class A Common (non-voting) Stock at the option of the employee.        For the years ended May 30, 2004, June 1, 2003, and June 2, 2002, the        bonus accrued under this agreement was $226,000, $263,000, and $298,000,    respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

F-22

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**HANOVER FOODS CORPORATION AND SUBSIDIARIES****Notes to Consolidated Financial Statements**

**Note 8 Benefit Plans (Cont’d)**

|   |   | The        Amended Employment Agreement also provides for the annual payment of        a long-term performance bonus based upon the Company’s performance        over the prior five-year period as measured by its average sales growth    and average increase in operating profits as compared to an industry peer        group over the same period. The bonus payable is calculated based upon        a formula matrix set forth in the Amended Employment Agreement, with        such formula being recommended by an independent management consulting        firm retained by the Company and approved by the Compensation Committee        of the Board of Directors. For the years ended May 30, 2004, June 1,        2003, and June 2, 2002, the long-term performance bonus accrued under    this agreement was $101,000, $169,000, and $157,000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   | The        Amended Employment Agreement provides for annual supplemental pension        benefits, commencing upon the earlier of (a) five years after termination        of the employee (or one year following his death or disability) or (b)        the date of retirement, payable during the life of the employee and upon        his death for the life of his spouse. Such annual supplemental pension        benefits are equal to 60% of average total compensation (including bonuses)        over the latest three-year period prior to retirement, assuming retirement        at age 65 or later. Supplemental pension benefits are reduced based upon        an established formula to the extent the employee retires prior to age        65. The net present value of the cost of providing this future benefit        is recognized by the Company over the remaining expected years of service.        The expense recognized under this agreement was approximately $1,158,000,        $863,000, and $773,000, for the years ended May 30, 2004, June 1, 2003,        and June 2, 2002, respectively. The projected benefit obligation was        approximately $5,493,000 and $4,447,000, May 30, 2004 and June 1, 2003,    respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   | The        Amended Employment Agreement was revised effective as of August 1, 1997        to make certain clarifying changes and to require that bonus payments        to Mr. Warehime in any taxable year in excess of $1.0 million would be        subject to shareholder approval, which shareholder approval was given    on August 14, 1997.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   | On        January 23, 1997, the Company entered into a five-year employment agreement        with Gary T. Knisely, Executive Vice President, Secretary, and Counsel        of the Company, at an annual salary of $175,000 with such compensation        payable retroactively from June 1, 1996 (the “Knisely Agreement”).        Unless terminated by either party, the Knisely Agreement automatically        renews annually on each anniversary date so that five years always remain        on the term of the agreement. The Knisely Agreement provides for annual        salary increases (but not decreases) equal to the greater of 5% of the        prior year’s salary or the annual percentage increase in the CPI,        as well as incentive bonuses and various other benefits. As of May 30,        2004, the aggregate liability of the Company under this agreement for        the next five years is estimated to be $1,481,000, excluding annual performance        bonuses. In the event the employee is terminated without cause, or in        the event the employee terminates his employment after a reduction (without        his written consent) of his duties or authority, compensation, or similar        events, the Knisely Agreement provides for the payment of the salary        and bonus (including all other benefits) over the remaining term of the        agreement. In the event of termination due to death or disability, the        Knisely Agreement provides for the payment of salary and bonus (including        all other benefits) to the employee (or his spouse or other descendants        in the event of the employee’s death) for the later of one year    from the date of such termination or the death of the employee.**** |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

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**HANOVER FOODS CORPORATION AND SUBSIDIARIES****Notes to Consolidated Financial Statements**

**Note 8 Benefit Plans (Cont’d)**

|   |      | The Knisely        Agreement also provides for annual supplemental pension benefits equal        to 60% of the employee’s average annual compensation (including        bonuses but excluding other benefits) over the three most recent fiscal        years prior to the employee’s termination if the employee is no        longer employed by the Company and the employee has attained the age        of55.        Such annual supplemental pension benefits are payable for the remainder        of the lifetime of the employee. The net present value of the cost of        providing this future pension benefit is recognized by the Company over        Mr. Knisely’s expected remaining years of service. The expense recognized        for supplemental pension benefits under this agreement was approximately        $274,000, $171,000, and $81,000, for the years ended May 30, 2004, June        1, 2003, and June 2, 2002, respectively. The pension liability was approximately        $1,191,000 and $593,000 and at May 30, 2004 and June1, 2003, respectively.                                                                                                                                                                                                                         |
|--------|-----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |      | The Company        also entered into a change in control severance agreements with several        officers and executives which provides for termination compensation if        respective individual’s employment is terminated: (i) involuntarily        within 24 months of a change in control or (ii) voluntarily, following        a reduction in base salary, duties, and responsibilities within 24 months        of a change in control. A “change in control” shall be deemed        to occur if John A. Warehime ceases to be Chief Executive Officer of        the Company or ceases to have the power and authority of the Chief Executive        Officer. Pursuant to the terms of this agreement, any payment due thereunder        shall be made over a two year period no less frequently than monthly        and all payments during any twelve month period shall not in the aggregate        exceed the individual’s total cash compensation (salary and bonus)    received from the Company during fiscal 2000.                                                                                                                                                                                                                                                                    |
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |      | All payments        made pursuant to this agreement are subject to the further conditions        that: (i) the individual maintain the confidentiality of the Company’s        trade secrets, customer lists, and other proprietary information of the        Company; (ii) for a period of two years following the termination of        the officer, neither the individual or his employer or business associate        shall enter into or attempt to enter into any business relationship,        solicit for employment or employ any person, employed by the Company        or its affiliates at any time within the six months prior to the officer’s        termination; and (iii) for a period of two years following the termination,        the individual shall not directly or indirectly own, manage, operate,        join, or participate in any capacity, any entity which is primarily engaged        in a business which competes with any significant business of the Company        or its affiliates. If all officers and executives subject to agreements        were terminated on May 30, 2004 under circumstances entitling them to        severance payments pursuant to the agreements, the aggregate amount due    to them under these agreements would be approximately $2,072,000. |
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | ***(e)*** | ***Stock    Option Plans***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |      | On June        20, 2002, the Corporation’s Board of Directors adopted the 2002        Stock Option Plan. 34,600 shares of the Corporation’s Class B Common        Stock, par value $25.00 per share, are authorized for issuance under        the 2002 Stock Option Plan, and options to purchase 13,500 shares were        granted during fiscal year 2003 with weighted-average exercise price        of $110 per share. Options vest at the rate of 12.50% per year beginning        June 20, 2004 and June 20 of each following year up to and including        June 20, 2011. All officers and key employees of the Corporation and        of any present or future parent or subsidiary of the Corporation are        eligible to receive options under the 2002 Stock Option Plan, excluding        John A. Warehime. No individual may receive options under the 2002 Stock        Option Plan for more than 15% of the total number of shares of the Corporation’s        Class B Common Stock authorized for issuance under the 2002 Stock Option    Plan.                                                                                                                                                                                                                                         |

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**HANOVER FOODS CORPORATION AND SUBSIDIARIES****Notes to Consolidated Financial Statements**

**Note 8 Benefit Plans (Cont’d)**

|   |   | On October        17, 2003, the Corporation’s Board of Directors adopted the Hanover        Foods Corporation 2003 Stock Option Plan (the “2003 Option Plan”).        All full-time employees (excluding employees represented by a collective        bargaining agent) of the Corporation and of any present or future parent        or subsidiary of the Corporation who have been employed for at least        one year, excluding John A. Warehime, are eligible to receive options        under the 2003 Option Plan. No individual may receive options under the        2003 Option Plan for more than 5% of the total number of shares of the        Corporation’s Class B common stock authorized for issuance under        the 2003 Option Plan. 200,000 shares of the Corporation’s Class        B common stock, par value $25.00 per share, are authorized for issuance        under the 2003 Option Plan. On October 17, 2003, the Board of Directors        of the Corporation voted to make a grant to all full-time, non-union        employees of the Corporation who have been employed by the Corporation        for at least one year, other than John A. Warehime except that if an        individual is in the employ of the Corporation or any of its subsidiaries        as of October 17, 2003, but has not been employed for at least one year        as of October 17, 2003, once the one year employment requirement has        been satisfied, the employee will receive stock options, with an option        price equal to the appraised fair market value at the time of the option        grant. The Board of Directors granted options for 199,450 shares of Class    B common stock. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   | The Stock        Option Plan will be administered by the Corporation’s Board of Directors        or by an option committee appointed by the Corporation’s Board of        Directors. The option committee will consist of a minimum of two and        a maximum of five members of the Board of Directors, each of whom will        be a “non-employee director” within the meaning of Rule 16b-3(b)(3)    under the Exchange Act.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   | Options        issued pursuant to the Stock Option plan may be either incentive stock        options or non-qualified stock options. An “incentive stock option” is        an option that satisfies all of the requirements of Section 422(b) of        the Internal Revenue Code of 1986, as amended, and the regulations thereunder,        and a “non-qualified stock option” is an option that either        does not satisfy all of those requirements of the terms of the option        provide that it will not be treated as an incentive stock option. The        option price for options issued under the Stock Option Plan will be equal        at least to the fair market value of the Corporation’s Class B Common        Stock on the date of the grant of the option. Options will not be granted        pursuant to the Stock Option Plan until after the expiration of the ten        years from June 20, 2002. The number of shares available for award under        the Stock Option Plan is subject to adjustment in the event of any change        in the outstanding shares of Class B Common Stock as a result of, among        other circumstances, a stock dividend, stock split, recapitalization,    merger, transfer of assets or reorganization.                                                                                                                                                                                                                                                                                                                                                                                                                                        |

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**HANOVERFOODS CORPORATION AND SUBSIDIARIESNotes to Consolidated Financial Statements**

**Note8 Benefit Plans (Cont’d)**

Thefollowing summarizes the transactions pursuant to the two plans:

 

|                                        | **2004****   ** |               |   ** ****2003** |                 |
|---------------------------------------------|--------------------------------|--------------------|--------------------------------|----------------------|
|                                        |                                |               |                                |                 |
|                              |                           |     |                 | **Weighted**         |     |   |     |   | **Weighted** |     |
|                                        | **Average    Price**           |               |                           | **Average    Price** |
| **Options**                                 | **Per Share**                  | **Options**        |                           | **Per Share**        |
|                                        |                                |               |                                |                      |   |  |   |   |  |   |
| Options    outstanding at beginning of year | 13,500                         |               | $                              | 110.00               |   | 0 |   | $ | 0.00 |   |
| Options    issued during year               | 199,450                        |               | $                              | 118.00               |   | 13,500 |   | $ | 110.00 |   |
| Options    outstanding at end of year       | 212,950                        |               | $                              | 117.49               |   | 13,500 |   | $ | 110.00 |   |
| Options    exercisable at end of year       | 0                              |               | $                              | 117.49               |   | 0 |   | $ | 110.00 |   |

The following table summaries information for stock options outstanding at May 30, 2004:

|                  |   | **Options Outstanding** |   |            |   |              |   | **Options Exercisable** |   |                 |
|-----------------------|--------|-------------------------|--------|-----------------|--------|-------------------|--------|-------------------------|--------|----------------------|
|                  |   |                         |   |            |   |              |   |                         |   |                 |
|                  |   |                    |   | **Weighted**    |   |              |   |                    |   |                 |
|                  |   |                    |   | **Average**     |   |              |   |                    |   |                 |
|                  |   |                    |   | **Remaining**   |   | **Weighted**      |   |                    |   | **Weighted**         |
|                  |   | **Number**              |   | **Contractual** |   | **Average Price** |   | **Number**              |   | **Average    Price** |
| **Exercise    Price** |   | **Outstanding**         |   | **Life**        |   | **Per Share**     |   | **Exercisable**         |   | **Per    Share**     |
|                       |   |                         |   |                 |   |                   |   |                         |   |                      |
| $110.00               |   | 13,500                  |   | 8               |   | $110.00           |   | 0                       |   | $110.00              |
| $118.00               |   | 199,450                 |   | 9.42            |   | $118.00           |   | 0                       |   | $118.00              |
| $110.00-118.00        |   | 212,950                 |   | 9.33            |   | $117.49           |   | 0                       |   | $117.49              |

|   |   | The         per share weighted average fair value of stock options granted during         2004 and 2003 is calculated as $35.27 and $26.23, respectively, on the         date of grant using the Black-Scholes option-pricing model. The weighted         average assumptions based on the date of grant are as follows:   **2004**  **2003**       Divided yield1% 1% Volatility8.6  8.6  Risk-free interest rate5.45% 3.5% Expected life9 years  9 years                ***(f)******Employee    Stock Ownership Plan***     The Company        has a noncontributory employee stock ownership plan in which substantially        all non-union employees are eligible to participate. The Company makes        annual contributions to the plan in an amount determined by a resolution        of the Board of Directors. Compensation expense is recorded for the amount        of the annual contribution to the plan as determined by resolution of    the Board of Directors of the Company.
 

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**HANOVER FOODS CORPORATION AND SUBSIDIARIES****Notes to Consolidated Financial Statements**

**Note      8**** BenefitsPlans ( Cont’d)**
 ***(g)******Defined    Benefit Plan***     On April        1, 2004, the Company acquired the assets of Venice Maid Foods. In connection        with the acquisition, the Company assumed the existing defined benefit    pension plan.     **May 30, 2004**     **Change in benefit obligation**       Benefit obligation at beginning of year$—     Acquisition 3,273         Benefit obligation at end of year$3,273      **Change in plan assets**       Fair value of plan assets at beginning of year$—     Acquisition 2,524         Fair value of plan assets at end of year 2,524         Funded status (749)        Accrued benefit cost$(749)     **Weighted-average assumptions as of**    **March 31, 2004**       Discount Rate 6.25%    Expected return on plan assets 8.50%    Rate of compensation increase 0%
**Note      9 ****IncomeTaxes**

Total income taxes for the years ended May 30, 2004, June 1, 2003, and June 2, 2002, were attributable to the following: 
   **May 30,**    **June 1,**    **June 2,** **2004****2003****2002**   Earnings from operations$5,586,000 $5,654,000 $5,121,000  Stockholders’ equity       for unrealized gains (losses)       on securities and minimum pension liability 110,000  (357,000) (45,000)       $5,696,000 $5,297,000 $5,076,000      
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**HANOVERFOODS CORPORATION AND SUBSIDIARIESNotes to Consolidated Financial Statements**

**Note      9 ****Income  Taxes (Cont’d)**

Income tax expense (benefit) attributable to earnings from operations consists of:
  **Current** **Deferred**  **Total**  Year ended May 30, 2004          U.S. Federal$4,240,000 $(169,000)$4,071,000  State 1,537,000  (22,000) 1,515,000        $5,777,000 $(191,000)$5,586,000       Year ended June 1, 2003          U.S. Federal$5,758,000 $(809,000)$4,949,000  State 1,049,000  (122,000) 927,000  Foreign (222,000) 0  (222,000)       $6,585,000 $(931,000)$5,654,000       Year Ended June 2, 2002          U.S. Federal$3,230,000 $385,000 $3,615,000  State 342,000  20,000  362,000  Foreign 1,144,000  0  1,144,000        $4,716,000 $405,000 $5,121,000      
The Guatemala government has granted an income tax exemption to the Company’s subsidiary Mayapac beginning 2001 through 2012. 

A reconciliation of the Company’s effective tax rate to the amount computed by applying the federal income tax rate of 35% to earnings before taxes attributable to earnings from operations expressed in percentages, follows: 

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**HANOVER FOODS CORPORATION AND SUBSIDIARIES****Notes to Consolidated Financial Statements**

**Note 9 IncomeTaxes (Cont’d)**
  **Year    Ended**   **Year    Ended**   **Year    Ended** **May 30,****June 1,****June 2,****2004****2003****2002**   Federal income tax rate35.0%35.0%35.0 % Increase (decrease) in taxes:          State taxes – net of federal tax benefit5.8 3.9 1.9             Taxes related to foreign subsidiaries(3.1)(1.5)3.3     Other items – net(4.9)(0.9)1.1       Effective income tax rate32.8%36.5%41.3 %     
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at May 30, 2004 and June 1, 2003 follow: 
   **May 30,**    **June 1,** **2004****2003** Deferred tax assets:     Inventory costs$209,000 $243,000     Accrued expenses and other liabilities 3,060,000  2,828,000     Pension and postretirement benefits 1,251,000  1,014,000     Net operating loss carryforwards 145,000  70,000     Minimum pension liability 0  364,000     Other 959,000  546,000               Total gross deferred tax assets$5,624,000 $5,065,000      Deferred tax liabilities:          Property, plant and equipment$(6,083,000)$(6,534,000)    Net unrealized gain on marketable securities 0  (59,000)    Other (1,572,000)$(694,000)              Total gross deferred tax liabilities (7,655,000) (7,287,000)     Net deferred tax liabilities$(2,031,000)$(2,222,000)    
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced.

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**HANOVER  FOODS CORPORATION AND SUBSIDIARIES****Notes  to Consolidated Financial Statements**

**Note  9 Income Taxes (Cont’d)**

The Company has not recognized a deferred tax liability for the undistributed earnings and tax basis differences of its investment in foreign subsidiaries since the earnings and investment are considered to be permanently invested in the businesses and, under the tax laws, are not subject to such taxes until distributed. The accumulated amount of such undistributed earnings was approximately $9,035,000 at May 30, 2004. 

At May 30, 2004, the Company has net operating loss carryforwards for state income tax purposes of approximately $1,722,000, which are available to offset future state taxable income, if any, through 2020. 

**Note  10 Commitments and Contingencies**
 ***(a)******Letter      of Credit***    ******As      of May 30, 2004, the Company’s wholly-owned reinsurance company had      outstanding two letters of credit in the amount of $131,000 and $985,000      as security for the reimbursement of losses arising from the reinsurance      assumed by the Company.    ***(b)******Legal      Matters***    **Derivative      Action**   On      September 13, 1996, certain Class A shareholders filed a complaint in equity      against six of the Corporation’s directors and the estate of a former      director in the Court of Common Pleas of York County, Pennsylvania (the      complaint). The suit also names the Corporation as a nominal defendant.      The suit sought various forms of relief including, but not limited to, rescission      of the board’s April 28, 1995 approval of John A. Warehime’s 1995      Employment Agreement and the board’s February 10, 1995 adjustment of      director’s fees. (Since the filing of this lawsuit, John A. Warehime’s      1995 Employment Agreement was amended.) In addition, the plaintiffs sought      costs and fees incident to bringing suit. On November 4, 1996, the complaint      was amended to add additional plaintiffs. On June 24, 1997, the Court dismissed      the amended complaint for failure to make a prior demand. An appeal was      filed on the Court’s June 24, 1997 Order. On December 2, 1998, the      Superior Court of Pennsylvania held that the derivative plaintiffs had made      adequate demand.     On      May 12, 1997, a written demand was received by the Corporation from the      attorney for those Class A shareholders containing similar allegations and      the allegations raised by the Class A common stockholders were investigated      by a special independent committee of the Board of Directors and found to      be without merit.    The      director defendants filed an Answer and New Matter to the amended complaint      on March 17, 1999. On September 5, 2001, director defendants filed a Motion      to Dismiss the Derivative Action. On September 20, 2001, plaintiffs filed      an answer to director defendants’ Motion to Dismiss. On May 17, 2002,      the court entered an order denying defendants’ Motion to Dismiss.    On      May 14, 2002, Albert Blakey, Esquire, counsel for certain of the derivative      plaintiffs filed a Petition for Fees seeking an award of $1,585,716 in attorney’s      fees. Defendants filed a response in opposition to the request for fees.      
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**HANOVER  FOODS CORPORATION AND SUBSIDIARIES****Notes  to Consolidated Financial Statements**

**Note       10 Commitments and Contingencies (Cont’d)**
 On      January 29, 2003, Albert Blakey, Esquire, counsel for certain derivative      plaintiffs filed a Motion for Reconsideration of the Court’s December      31, 2002 denial of the Petition for Fees. A Response in Opposition to the      Motion for Reconsideration of Plantiffs’ Petition for Fees was filed      with the Court on February 12, 2003.     *Warehime      Family Litigation*   On      February 13, 1997, the Board of Directors proposed an amendment and restatement      of the Corporation’s Articles of Incorporation (the “Amended and      Restated Articles”) which provides that if all of the following Class      B shareholders (or their estates upon the death of such shareholders), Michael      A. Warehime, John A. Warehime, Sally W. Yelland, J. William Warehime, and      Elizabeth W. Stick (all members of the Warehime family), do not agree in      writing to the composition of the Board of Directors or other important      matters specified below on or after the 1998 annual shareholders meeting,      the trustees of the Corporation’s 401(k) Savings Plan (or a similar      employee benefit plan), who qualify as disinterested directors acting as      fiduciaries for the employees who participate in the Plan, and the Class      A shareholders may become entitled to vote in the manner described in the      document.   The      Amended and Restated Articles created a Series C Convertible Preferred Stock      , which, in case of a dispute among the above mentioned members of the Warehime      family on Board of Directors composition or other important matters, would      be entitled to 35 votes per shares (a total of 350,000 votes based on 10,000      shares of Series C Convertible Preferred Stock issued to and held by the      trustees of the Corporation’s 401(k) Savings Plan); if Series C Convertible      Preferred Stock were entitled to vote because of such dispute, each share      of Class A Common Stock would be entitled to 1/10th      of a vote per share.    The      Amended and Restated Articles also classified the terms of the Board of      Directors commencing with the election at the 1997 annual shareholders’      meeting and permitted directors to be elected for four-year term as permitted      by Pennsylvania law. Pursuant to the Corporation’s Bylaws, as then      in effect, nominations for directors must be submitted to the Corporation      in the manner prescribed by the Bylaws no later than June 1 of the year      in which the meeting is to occur.    On      February 21, 1997, Michael A. Warehime, a Class B shareholder, and certain      Class A shareholders filed motions for a preliminary injunction against      the Corporation, John A. Warehime, in his capacity as voting trustee, and      certain directors of the Corporation in the Court of Common Pleas of York      County, Pennsylvania against a Proposal of the Board of Directors to amend      and restate the Corporation’s Articles of Incorporation in the manner      described herein.    The      motions for a preliminary injunction were dismissed by the Court on June      24, 1997. The Class B shareholders on June 25, 1997 approved the Amended      and Restated Articles (John A. Warehime, being the sole Class B shareholder      voting affirmatively in his capacity as voting trustee) and the Amended      and Restated Articles became effective June 25, 1997. In August 1997, the      Board of Directors proposed a further amendment (the “Amendment”)      to the Amended and Restated Articles to expand the definition of “disinterested      directors” in the manner described below, and to approve certain performance      based compensation for John A. Warehime solely for the purpose of making      the Corporation eligible for a federal income tax deduction pursuant to      Section 162(m) of the Internal Revenue Code of 1986, as amended. A special      meeting was
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**HANOVER  FOODS CORPORATION AND SUBSIDIARIES****Notes  to Consolidated Financial Statements**

**Note  10 Commitments and Contingencies (Cont’d)**
 scheduled      for August 14, 1997 (the “Special Meeting”) to vote on these proposals.      On August 8, 1997, Michael A. Warehime filed a motion in the Court of Common      Pleas of York County, Pennsylvania to prevent John A. Warehime, in his capacity      as voting trustee from voting on these proposals and to enjoin the Amendment.      This motion was denied by the Court on August 11, 1997. The Amendment and      the proposal under Section 162(m) were approved by Class B shareholders      (John A. Warehime was the sole Class B shareholder to vote affirmatively,      in his capacity as voting trustee) on August 14, 1997 and the Amendment      became effective on August 14, 1997.    Under the      Amendment, the definition of “disinterested directors” means a      person who, in the opinion of counsel for the Corporation, meets any of      the following criteria: (i) disinterested directors as defined in Section      1715(e) of the Pennsylvania Business Corporations Law of 1988, as amended;      (ii) persons who are not “interested” directors as defined in      Section 1.23 of The American Law Institute “Principles of Corporate      Governance: Analysis and Recommendations” (1994); or (iii) persons      who qualify as members of the Audit Committee pursuant to Section 303.00      of the New York Stock Exchange’s Listed Company Manual.    Michael      A. Warehime filed an appeal from the denial of his motion to enjoin the      previously described Amendment to the Corporation’s Amended and Restated      Articles. On December 2, 1998, a majority panel of the Superior Court of      Pennsylvania issued a decision holding that although John A. Warehime had      acted in good faith in voting for the Amendment to the Amended and Restated      Articles as trustee of the Warehime voting trust, he had breached his fiduciary      duty to the beneficiaries of the Warehime voting trust in voting for the      Amendment. On November 29, 1999, the Supreme Court of Pennsylvania granted      a petition for allowance of appeal, filed by John A. Warehime, and granted      a cross-petition for appeal filed by Michael A. Warehime.    On August      13, 1999, Michael A. Warehime filed a complaint in equity in the Court of      Common Pleas of York County, Pennsylvania, naming as defendants Arthur S.      Schaier, Cyril T. Noel, Clayton J. Rohrbach, Jr., John A. Warehime, and      the Corporation. The complaint sought a court order declaring that the September      1999 election for the Board of Directors of the Corporation be conducted      in accordance with the Articles of Incorporation of the Corporation as they      existed prior to June 25, 1997, an order declaring that the Series C Convertible      Preferred Stock cannot be voted, and an order that the following candidates      for the Board of Directors of the Corporation proposed by Michael A. Warehime,      Sally Yelland, Elizabeth Stick and J. William Warehime be accepted by the      Corporation and listed on the ballot to be distributed at the annual meeting      of shareholders of the Corporation to be held on September 16, 1999: Michael      A. Warehime, Daniel Meckley, Elizabeth Stick, Sonny Bowman, and John Denton.      The basis for the complaint was the December 2, 1998 decision of the Superior      Court of Pennsylvania which held that John A. Warehime breached his fiduciary      duties in voting for the Amended and Restated Articles as trustee of the      Warehime voting trust. The requested relief was denied by the Court of Common      Pleas of York County and Michael Warehime appealed to the Superior Court      of Pennsylvania.    On September      12, 2000, the Superior Court of Pennsylvania stated, in a Memorandum decision,      that the June 25, 1997 shareholder vote, which adopted the Amended and Restated      Articles of the Corporation should be set aside, and remanded the case to      the Court of Common Pleas of York County to determine what further relief      would be appropriate. On remand, the Court of Common Pleas of York County      entered an Order on October 10, 2000 declaring that the Amended andRestated Articles      of Incorporation were set aside and that an election should be held without      the Amended or Restated Articles. On October 11, 2000, the Supreme Court      of Pennsylvania entered an Order staying the Order of the Court of Common      Pleas of York County.  
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**HANOVER FOODS CORPORATION AND SUBSIDIARIES****Notes to Consolidated Financial Statements**

**Note 10 Commitmentsand Contingencies (Cont’d)**
 On        November 27, 2000, the Supreme Court of Pennsylvania reversed and remanded        the Order of the Superior Court issued on December 2, 1998 and, in effect,        the Order of the Superior Court issued September 12, 2000. In reversing        the Superior Court’s Order, the Supreme Court of Pennsylvania held        that John A. Warehime, the trustee of the voting trust, did not breach        his fiduciary duties in voting the trust shares in favor of the Amended        and Restated Articles of Incorporation. The Supreme Court remanded the        case to the Superior Court of Pennsylvania to consider other issues raised        by Michael A. Warehime. On September 17, 2002, the Supreme Court of Pennsylvania    granted defendant’s petition for Allowance of Appeal.     
On          May 4, 2001, the Superior Court of Pennsylvania, on remand from the          Supreme Court of Pennsylvania to decide several remaining issues, held          that the 1997 amendments to the Corporation’s Amended and Restated          Articles of Incorporation “violated principles of corporate democracy” and          should be invalidated even though the Superior Court found the directors          acted in good faith and their actions in approving the amendments did          not result in a breach of their fiduciary duties. A petition for allocatur          was filed with the Supreme Court of Pennsylvania requesting that the          Supreme Court of Pennsylvania review the Superior Court’s May          4, 2001 ruling. On September 17, 2002, the Supreme Court of Pennsylvania          granted the petition for allocatur and oral argument was heard in the          matter on May 13, 2003.
    On        December 12, 2002, Michael Warehime filed an Emergency Application for        Expedited Relief with the Pennsylvania Supreme Court in the Warehime        v. Warehime  appeal        concerning the election of directors noticed for December 23, 2002. The        Pennsylvania Supreme Court denied Michael Warehime’s emergency application    on December 20, 2002.     
On          December 12, 2002, Michael Warehime filed a Motion for Relief under          the Warehime v. Schaier caption          in the York County Court of Common Pleas. Michael Warehime’s motion          requested, interalia, that          Hanover Foods Corporation’s December 23, 2002 election be conducted          according to the Articles of Incorporation as they existed prior to          June 25, 1997. Following a hearing on December 20, 2002, the York County          Court of Common Pleas denied Michael Warehime’s Motion for Relief.          On January 17, 2003 Michael Warehime appealed the Court’s denial          of his Motion for Relief to the Superior Court of Pennsylvania. Oral          argument was heard in this matter before the Superior Court of Pennsylvania          on January 13, 2004. On April 22, 2004, the Superior Court of Pennsylvania          issued a memorandum reversing the December 22, 2002 decision by the          York Court of Common Pleas and remanding for further proceedings.
    The        Corporation is involved in various other claims and legal actions arising        in the ordinary course of business. In the opinion of management, the        ultimate disposition of these matters will not have a material adverse        effect on the Corporation’s consolidated financial position, results    of operations or liquidity.    
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**HANOVER FOODS CORPORATION AND SUBSIDIARIES****Notes to Consolidated Financial Statements**

**Note 10 Commitmentsand Contingencies (Cont’d)**
 ***(c)******Stock Repurchase Plan***     Sixty-six      (66) shares of the Company’s Class A Common Stock were repurchased      under the plan for the fiscal year ended May 30, 2004. The Company has      agreed to purchase the Company’s Class A Common Stock purchased or      owned by employees prior to April 20, 1988 at appraised value. This guarantee      of repurchase by the Company is for an indefinite period of time. No shares      were repurchased under this plan for the year ended June 1, 2003. As of      May 30, 2004, there are 8,983 shares outstanding that would be eligible      for this plan. The maximum commitment, if requested, for all eligible shares      would be approximately $1,051,000 based on the most recent appraised value    per share as of March 31, 2004.    ***(d)******Sales and Lease Agreement***     In      February 2004, the Company entered into a Lease Agreement and Tomato Paste      Purchase Agreement to lease the Colusa plant for three (3) years beginning      July 1, 2004 and to purchase 6 million pounds of tomato paste on a cost      basis formula from the lessee during the second through sixth year of the      agreement The Company expects to use this annual purchase commitment through    normal operations.
**Note 11 ForeignOperations**

The    Company’s      foreign subsidiary, Mayapac, S.A. produces food products in Guatemala,    which are sold to Sunwise Corporation in the United States. The revenues    generated      by the operations in Guatemala and the assets employed in generating thoserevenues are as follows: 
  **May 30,** **June 1,** **June 2,**   **2004** **2003** **2002**       Revenues$20,539,000 $19,072,000 $18,699,000  Cost of goods sold 18,324,000  16,911,000  15,075,000  Assets 12,459,000  9,964,000  9,092,000 
Maya Pac maintains    its accounting records in quetzals. For financial reporting purposes the    U.S. dollar is considered the functional currency. The financial statements    of MAYAPAC, S.A. have been translated to their U.S. dollar equivalents prior    to being consolidated. Assets and liabilities have been translated to their    U.S. dollar equivalents based on rates of exchange prevailing at the end    of the period except for inventories, fixed assets, deferred and prepaid    expenses, and other assets, which have been translated at historical rates.    Revenue and expense accounts have been translated at average exchange rates    during the period except for depreciation of fixed assets, which is based    on the historical rate. The aggregate exchange gains and losses arising from    the translation of foreign assets and liabilities and from foreign currency    transactions are included in income under the caption of Other income – net,    and amount to a loss of $115,000, $15,000, and $178,000, or the years ended    May 30, 2004, June 1, 2003, and June 2, 2002, respectively. At May 30, 2004the prevailing exchange rate was Q 8.0 to U.S. $1.00. 

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**HANOVER FOODS CORPORATION AND SUBSIDIARIES****Notes to Consolidated Financial Statements**

**Note 12 Reconciliationof Numerator and Denominator for Basic and Diluted Earnings per Share**
  **Year    Ended** **Year    ended** **Year    ended**   **May    30, 2004** **June    1, 2003** **June    2, 2002**       Numerator for basic earnings per share:              Net earnings applicable to                  Common stock$11,400,000 $9,833,000 $7,230,000  Effect of dilutive securities:          8 1⁄4% cumulative convertible              Preferred stock 30,000  30,000  30,000  4.40% cumulative convertible              Preferred stock 11,000  11,000  11,000       Net earnings assuming dilution$11,441,000 $9,874,000 $7,271,000                  Denominator:          Basic weighted-average shares 724,186  720,684  716,191  Effect of dilutive securities:          8 1⁄4% cumulative convertible              Preferred stock 3,422  3,066  3,386  4.40% cumulative convertible              Preferred stock 10,000  10,000  10,000       Diluted weighted-average shares 737,608  733,750  729,577       Basic earnings per share$15.74 $13.64 $10.10  Diluted earnings per share 15.51  13.46  9.97      
Stock options of 199,450 and 13,500 shares in 2004 and 2003, respectively, are not included in the earnings per share computation as their effect would have been anti-dilutive. Shares held in the Employee Stock Trust are not considered to be outstanding for the purposes of the calculation of earnings per share.

**Note 13 Statementof Cash Flow Information**
  **Year    Ended** **Year    Ended** **Year    Ended**   **May    30, 2004** **June    3, 2003** **June    2, 2002**       Supplemental disclosure of cash paid for:              Interest$2,404,858 $2,874,000 $3,292,000      Income taxes 6,686,000  5,004,000  4,043,000      
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**QUARTERLY  FINANCIAL DATA**
 **Dollars      in thousands      (except per share)** **First      quarter**  **Second      Quarter**   **Third      quarter**  F**ourth      quarter**   2004             Net sales $66,900 $84,223 $83,009 $83,896 Gross profit $9,639 $13,568 $11,443 $12,399 Net earnings $1,812 $4,306 $2,351 $2,972 Net earnings      per common share – Basic $2.49 $5.95 $3.25 $4.25 Net earnings      per common share – Diluted $2.46 $5.91 $3.23 $3.91 Cash Dividends      per common share $.275 $.275 $.275 $.275               2003             Net sales $63,427 $79,897 $73,161 $73,826 Gross profit $10,340 $12,770 $12,504 $10,395 Net earnings $1,772 $3,682 $2,354 $2,066 Net earnings      per common share – Basic $2.47 $5.12 $3.26 $2.79 Net earnings      per common share – Diluted $2.43 $5.05 $3.22 $2.76 Cash Dividends      per common share $.275 $.275 $.275 $.275  
**MARKET  FOR THE REGISTRANT’S COMMON EQUITY****AND RELATED  STOCKHOLDER MATTERS**

Although the Corporation’sClass B Common Stock is currently quoted on the OTC Bulletin Board under thesymbol “HNFSB” and the Corporation’s Class A Common Stock is currently quotedon the OTC Bulletin Board under the symbol “HNFSA,” trading in theClass B and Class A Common Stock is very sporadic. As a result of the limitedmarket for Class B and Class A Common Stock, shareholders are cautioned not toplace undue reliance on bid prices contained herein as indicators of the truevalue of the shares of Class B and Class A Common Stock. 

The following table sets forth the high and low bid prices per share of the Class A and Class B Common Stock on a quarterly basis of the past two fiscal years as provided by NASDAQ, as well as dividends paid per share. Over-the-Counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
   **Class      A Common Stock**   **Class      B Common Stock**      **Quarter      Ended********High** **Low** ******Dividends** ******High** **Low** ******Dividends**        September      1, 2002 $53.00 $51.75 $0.275  —  — $0.275 December      1, 2002 $50.75 $49.25 $0.275 $25.45 $25.00 $0.275 March 2,      2003 $52.75 $50.00 $0.275 $25.45 $25.00 $0.275 June 1,      2003 $61.00 $54.00 $0.275 $25.50 $25.50 $0.275 August 31,      2003 $70.50 $52.50 $0.275 $27.00 $26.00 $0.275 November      30, 2003 $75.00 $71.70 $0.275 $27.00 $27.00 $0.275 February      29, 2004 $94.00 $76.00 $0.275 $27.00 $27.00 $0.275 May 30,      2004 $95.00 $82.00 $0.275 $27.00 $27.00 $0.275                     
Class B Common    Stock started being quoted on the OTC Bulletin Board as of October 9, 2002.    Therefore information for the high and low bid prices per share of Class    B Common    Stock  for the quarter ended December 1, 2002 is available only starting from October  9, 2002. 

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As of August 11, 2004, there were 334 record holders of the Class A Common Stock and there were 43 record holders of Class B Common Stock. 

Issuer  Purchases of Equity Securities 
**Period** **Total number of      Shares (or units)      Purchased** **Average Price Paid      per Share (or Unit)** **Total Number of      Shares (or Units)      Purchased as Part of       Publicly Announced       Plans or Programs(1)** **Maximum Number      (or Approximate Dollar      Value) of Shares (or       Units) that May Yet be       Purchased Under the       Plans or Programs**    February      1 – 29, 2004 44 $114/share 44 9,005      sharesApril 1      – 30, 2004 22 $114/share 22 8,983      shares     Total 66 $114/share 66 8,983      shares                                (1)In 1988,        the Company publicly announced its plan to purchase the Company’s        Class A Common Stock purchased or owed by employees prior to April 20,        1988 at appraised value available at the time of repurchase. The appraised        value is determined by an independent appraiser on a quarterly basis.        This guarantee of purchase is for an indefinite period of time. 
**DIVIDEND    POLICY**

The Corporation has maintained a policy of paying a quarterly dividend of $0.275 per share for both Class A and Class B Common Stock. The continuing payment by the Corporation of dividends in the future is at the sole discretion of its Board of Directors and will depend, among other things, upon the Corporation’s earnings, its capital requirements and financial condition, restrictive covenants in the Corporation’s credit facilities, as well as other relevant factors.

**CHANGES  IN AND DISAGREEMENTS WITH****ACCOUNTANTS  ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 	On December 16, 2003, the audit committee of the Company engaged BDO Seidman, LLP as the Company’s independent auditor to audit the Company’s consolidated financial statements for the year ending May 30, 2004. KPMG LLP who had been engaged by the Company as the independent accountants to audit the Company’s consolidated financial statements was dismissed effective December 16, 2003. The decision to change the Company’s independent accountants from KPMG LLP to BDO Seidman, LLP was approved by the audit committee of the Board of Directors. 

 	The reports of KPMG LLP, on the financial statements of the Company during the two-year period ended June 1, 2003, did not contain an adverse opinion, or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope, or accounting principles.  During the two-year period ended June 1, 2003, and interim period from June 1, 2003 through December 16, 2003, the Company did not have any disagreements with KPMG LLP, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG LLP, would have caused it to make a reference to the subject matter of the disagreements in connection with its reports. 

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**ANNUAL AND OTHER REPORTS**

The Corporation is required to file an annual report on Form 10-K for its fiscal year ended May 30, 2004 with the Securities and Exchange Commission. Copies of the Form 10-K annual report, including exhibits, and the Corporation’s quarterly reports may be obtained without charge by contacting: 
 
Gary T. Knisely        Executive        Vice President, Secretary, Counsel        Hanover Foods Corporation        1486 York Street        P.O. Box 334        Hanover, PA 17331 717-632-6000

  

 

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**OFFICERS AND BOARD OF DIRECTORS**

**OFFICERS**

**JOHN A. WAREHIME**Chairman,President & Chief Executive Officer
**GARY T. KNISELY, ESQ.********PIETRO    D. GIRAFFA, JR.****STEVEN E. ROBERTSON**Chief Financial OfficerChief Accounting    OfficerTreasurerExecutive Vice PresidentVice President – Controller Secretary, Counsel     **ALAN T. YOUNG****DANIEL E. SCHUCHART**Senior Vice President- Purchasing and TransportationVice President of Sales  **BOARD    OF DIRECTORS** **JOHN A. WAREHIME********ARTHUR    S. SCHAIER****JAMES A. WASHBURN**Chairman of the Board President & Chief    Executive OfficerChief Executive OfficerHanover Food Corporation Schaier    Nissan, Schaier HondaPark 100 Foods, Inc., a food Long Beach,    CA, a retail auto dealershipmanufacturing companyTipton, IN **CLAYTON J. ROHRBACH********T.    EDWARD LIPPY****CYRIL T. NOEL**Retired Vice President of Marketing CPC Vice PresidentRetired Vice President of FinanceInternational, a food company Lippy Brothers,    Inc., a farming companyHanover Foods CorporationEnglewood Cliffs, NJ Hampstead,    MD  **JAMES G. STURGILL, CPA, CVA********JENNIFER    W. CARTER****T. MICHAEL HAUGH**Managing Partner Retired    Assistant to the ChairmanPresidentSturgill & Associates LLP, Hanover    Foods CorporationHospitality Management Corporation, aan accounting firm, Westminster, MD  contract food service companyAbbottstown, PA
****

 
**EXECUTIVE    OFFICES** **CERTIFICATE    TRANSFER MAIL**1486 York    Street, P.O. Box 334, Hanover, PA 17331-0334**MELLON    INVESTORS SERVICES, L.L.C.**     (717) 632-6000Securities    Transfer Services P.O. Box    3300**SHAREHOLDER    INQUIRIES**South Hackensack,    NJ 07606-1910Shareholder    inquiries should be directed to the following    offices and addresses. NOTE: It    is recommended that all certificates be sent via    registered mail. All telephone    inquiries should be made by using the toll-free 1-800-756-3353. **CERTIFICATE    TRANSFERS HAND DELIVERIES**Copies    of 10-K report are available upon request.Mellon    Investors Services, L.L.C.  120 Broadway,        13th Floor****New York,    NY 10271**SHAREHOLDER    INQUIRIES ADDRESS CHANGES** **CONSOLIDATING**  **CLASS    A COMMON STOCK**Hanover    Foods CorporationClass A    Common Stock is quoted on the OTC bulletin board.P.O. Box    3316 South Hackensack,    NJ 07606-1916**CLASS    B COMMON STOCK**www.melloninvestor.com  Class B    Common Stock is quoted on the OTC bulletin board.  **LOST    CERTIFICATES CERTIFICATE****CERTIFIED    PUBLIC ACCOUNTANTS****REPLACEMENT**BDO Seidman    LLP, Bethesda, Maryland Mellon    Investors Services, L.L.C. Lost Securities    Department**LEGAL    COUNSEL**P.O. Box    3317Blank Rome    LLP, Philadelphia, Pennsylvania South Hackensack,    NH 07606-1917     |
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